Prediction Synergy of Banks’ Credit Risk Models

JEL: G17, G21, G24, G33, C23, C53, C58

Key words: credit risk, credit rating, rating agencies, probability of default, banks, multinomial ordered logit/probit models 

Abstract

The paper is aimed at comparing the divergence of existing credit risk models and creating a synergic model with superior forecasting power based on a rating model and probability of default model of Russian banks. The paper demonstrates that rating models, if applied alone, tend to overestimate credit risk of a bank, whereas probability of default models give underestimated results. As a result of the assignment of optimal weights and monotonic transformations to these models, the new synergic model of banks’ credit risks with higher forecasting power was obtained. Moreover, the output of the synergic model was calibrated into probability of default using the dynamic historic default frequencies in order to obtain a quantitative measure of credit risk. The construction of a dynamic rating scale also allowed us to develop an investment strategy: the most stable period of Russian banks with the highest ratings is the first two years after the rating assignment, while investing in highly speculative banks, on the contrary, is advisable after two years from the moment of a rating assignment. 

October 7, 15:00 – 17:00. Track: Innovations in the banking sector – Chairperson: Alexander Karminsky

Reports:
1. Kirill Romanyuk: Application of alternative date in credit scoring
2. Voytov N. Karminsky A.: Banking ecosystems in Russia and their modeling
3.Egorov A.: Financial Innovation and Financial Risks
4.Arkhipova N.: Financial Innovations in CEE Countries
5. Orlova A.: Government support for innovative business in Russia

October 21, 15:00 – 17:00. Track: Innovations in the banking sector – Chairperson: Alexander Karminsky

Reports:
1. Pomazonov M. Method of indirect estimation of default probability dynamics for industry-target segments according to the Bank of Russia
2. Pomorina M., Oberemko T. Economic capital structure and bank financial risk aggregation model
3. Pomazkin D., Egorov A. Assessment of the risk of a decrease in the customer base of banks in connection with the development of financial technologies
4. Vasilieva A. Migration matrices as a tool for calculating the probability of default for the entire life of an asset

October 21, 17:30 – 19:30. Track: Innovations in the banking sector – Chairperson: Alexander Karminsky

Reports:
1. Dyachkova N., Grishunin S. Rating agencies in the BRICS countries
2. Khromova E., Kudrov R, Karminsky A. Empirical modeling of international banks’ credit risk: assessment and comparison of credit ratings
3. Astakhova A., Grishunin S. Development of a rating system for prediction of credit risk and probability of default of Russian banks using machine learning models
4. Egorova Al., Agaeva E., Barkhatov S., Lozovoy V. Comparison of empirical methods for modelling of credit ratings of machine building companies from developed and developing markets

National Rating Agency (NRA) and National research university Higher School of Economics (HSE) agreed on full-scale cooperation and collaboration in preparing analytic materials and shared participation in developing risk assessment models.

The aim of the agreement is realization of principles of openness and transparency in the financial market, as well as the improvement of theoretical and practical ways of risk assessment involving postgraduates and students in the project process. 

Further cooperation of NRA and HSE, represented by the faculty of economics, supposes:

• development of empirical approaches for creation and comparison of methodologies and models for assessing financial risks of enterprises from various industries, as well as methodological approaches of risks estimation in the activities of companies and banks, development of financial risk models for different types of assets;
• joint development of the theory and practice of integrated risk management by the HSE School of Finance “Banks and finance market” research center and NRA;
• formation of the database with key indicators for assessing financial risks of various companies and assets on the basis of analytical and expert materials prepared by NRA in collaboration with the HSE School of Finance “Banks and finance market” research center;
• publication of information-analytical and expert materials prepared by NRA in collaboration with the HSE School of Finance “Banks and finance market” research center;
• organization of practical internship for students of the HSE School of Finance in NRA.

“It is important for us to develop cooperation with leading universities in order to base on academic approaches and competencies accumulated by the faculty, as well as to jointly prepare analytic researches and develop new risk assessment models in our methodological work. Among the first projects with the HSE Faculty of Economics, we plan to participate jointly in the development of methodology for project evaluation and project companies. The work is planned to start in autumn of this year.” - Victor Chetverikov, Managing Director for NRA development projects.

Discussion of manuscript book

“Finance risk estimation and modelling in emerging market banking» prepared within the series “Advanced Studies in Emerging Markets Finance” for Springer publisher. 

(session 1, moderator - A.M. Karminsky)

16.00 - 16.15 - Karminsky A.M. 

Presentation of the book’s editorial board, the author's team and the structure of the book.

16.15 - 16.40 - Artem Arkhipov, Natalia Arkhipova.

Part I Presentation of the book “Banks in emerging markets”, consisting of chapters:

• Peculiarities and Trends of Banking Systems Development
• Regulation of Financial Risks in Emerging Markets in 21^st Century

16.40-16.50 Discussionists - N.V. Gorelai, KaramyshevaM.R. 

Discussion of the part and presentation 

16.50-17.15 Sergey Grishunin, Natalia Dyachkova

Part II Presentation of the book 'Ratings and Risk Measuring', consisting of chapters:

• Principles of Rating Estimation in Emerging Countries
• Aggregation of rating systems for emerging financial markets

17.15-17.25 - Discussionist - V.A. Lapshin. 

Discussion of the part and presentation 

17.25-17.50 - Dmitry Pomazkin 

Part V Presentation of the book 'Estimating and managing financial risks: actual trends in emerging capital markets', consisting of chapters:

• Innovation in developing countries risk assessment and management
• Dynamic fractal asset pricing model for financial risk evaluation
• Network model for estimation of retail payments risk: Russian experience

17.50-18.25 - Discussionist - Dranev Yu.

The work was highly appreciated by the members of the Dissertation Committee. They unanimously decided to recommend the Dissertation Council on Economics to award Alexey Igorevich Rybalka a Doctoral degree in Economics.

Rybalka Alexey, AS graduate in economics, leading expert of the Center for Macroeconomic Analysis and Short-Term Forecasting, researcher of the Central Research Institute of the Higher School of Economics, associate member of the research working group "Banking sector innovations, its financial stability and prudential regulation".