Transcript Discussion by Xavier Freixas

Some Evidence on the
Consistency of Banks’Internal
Credit Ratings
By Mark Carey
Discussion: Xavier Freixas
Summary
• The paper exploits a carefully designed
database, the Loan Loss Database and
allows to identify and to predict
disagreement in internal credit ratings. But
consistency does not mean accuracy
Main results
• Overall, lenders are neither optimistic nor
pessimistic (computed on the required
capital so as to avoid an important biais on
the riskier borrowers)
• There is no convergence over time (after
one year)
Main results (II)
• Rating disagreement across lenders are not
very predictable from borrower
characteristics.
• Disagreements are less likely for large
borrowers and for borrowers that have not
drawn down much on their lines of credit.
• Small disagreements are important for high
quality borrowers.
Non significative variables:
• Surprisingly, the following variables are not
significative in explaining internal ratings
disagreement
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Industry
Location
Time since origination
agency rating
Motivation for the paper
• An evolutionary view of the market
conflicts with prudential regulation.
• Banks that enter a new segment of business
are likely to be less accurate: Learning by
lending assumption.
• Relationship banking and ex post monopoly
of information.
• Incentives to missreport: Aghion Bolton and
Fries(2000) and Mitchell (2000)
Reinterpreting the results
• Regarding overoptimistic lenders, results
are reassuring. Still, the lender dummy is
highly significative in the regression. This
may be due because conditionally on the
regression variables some lenders are
optimistic and other pessimistic.
• Regarding the the learning by lending
assumption results indicate (unconditional)
lack of convergence after one year.
A suggestion on ratings
• There is more agreement for high risk
classes.
• If confirmed, this suggests that we could
refine the risk class partition