Modeling Credit Risk for SMEs: Evidence From the US Market
Submitted by admin on Fri, 2006-09-22 20:57
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At the beginning of the year, NYU's Edward Altman, the creator of the famous Z-Score, and Gabriele Sabato, of the University of Rome, released this interesting one-year default prediction model for small and medium-sized enterprises. It found that banks who used it could lower capital requirements for many of these businesses and that banks would be advised to use different scoring and ratings systems than those implemented for large companies when judging them.
Here is a snippet from their abstract: "Through a breakeven analysis, we find that for all of our countries, banking organizations will be obliged to classify as retail at least 20% of their SME portfolio in order to, at a minimum, maintain the current capital requirement (8%). Moreover, we show that the percentage of SMEs to be classified as retail increases to at least 40% if banks will want to enjoy lower capital requirements by implementing the Advanced IRB instead of the Standardized approach. Since one of the main goals of the new Basel Capital Accord is to improve the efficiency of banks risk management systems, we conclude that a likely impact will be an additional motivation for banks to consider and manage their SMEs clients as retail customers."
Technorati Tags: altman, credit risk, distressed, z-score, sabato, small and medium sized companies
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