Internal credit ratings are expected to gain in importance because of their potential use for determining regulatory capital adequacy and banks increasing focus on the risk-return profile in commercial lending. Whereas the eligibility of financial factors as inputs for internal credit ratings is...

With the New Basle Capital Accord banks’ capital requirements are determined with risk weights based on internaland external ratings and probabilities of default (PD’s). PD’s are mostly estimated from historical defaultrates. In recent working papers the Basle Committee on Banking...