4.2 External Credit Ratings
“that company is AAA.”
“Our country risks to be downgraded to BBB.”
“That bond is in the speculative grade”.
The aim of this class is to clarify the sentences above. Next time you will read them on a newspaper, you will be able to fully get their meaning.
We will deal with external credit ratings.
We will try to understand how rating agencies work, and what the usefulness of credit ratings is.
External credit ratings are used both in the STA and in the IRB approaches (especially in the F-IRB). But while in the STA approach they are just taken as they are, just to apply the correct weights for the computation of RWA, in the IRB approaches we can use credit ratings to compute the PD of a counterparty.
At the end of this class, you will be able to read a transition matrix, and to compute the Probability of Default of a company over different time horizons.
You will also learn the difference between unconditional and conditional default probability.
External Credit Ratings
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Introduction to Credit Risk Management by TU Delft OpenCourseWare is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
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