Rating Models and Validation - Oesterreichische Nationalbank

Rating Models and Validation
perform comprehensive analyses in this process with due attention to the essential
factors relevant to creditworthiness, we can regard country ratings as the
primary source of information for credit assessment. This external credit assessment
should be supplemented by observations and assessments of macroeconomic
indicators (e.g. GDP and unemployment figures as well as business
cycles) for each country. Experience on the capital markets over the last few
decades has shown that the repayment of loans to governments and the redemption
of government bonds depend heavily on the legal and political stability of
the country in question. Therefore, it is also important to consider the form of
government as well as its general legal and political situation. Additional external
data which can be used include the development of government bond prices
and published capital market information.
Regional Governments
This category refers to the individual political units within a country (e.g. states,
provinces, etc.). Regional governments and their respective federal governments
often have a close liability relationship, which means that if a regional
government is threatened with insolvency the federal government will step in
to repay the debt. In this way, the credit quality of the federal government also
plays a significant role in credit assessments for regional governments, meaning
that the country rating of the government to which a regional government
belongs is an essential criterion in its credit assessment. However, when the
creditworthiness of a regional government is assessed, its own external rating
(if available) also has to be taken into account. A supplementary analysis of macroeconomic
indicators for the regional government is also necessary in this context.
The financial and economic strength of a regional government can be
measured on the basis of its budget situation and infrastructure. As the general
legal and political circumstances in a regional government can sometimes differ
substantially from those of the country to which it belongs, lending institutions
should also perform a separate assessment in this area.
Local Authorities
The information categories relevant to the creditworthiness of local authorities
do not diverge substantially from those applying to regional governments. However,
it is entirely possible that individual criteria within these categories will be
different for regional governments and local authorities due to the different
scales of their economies.
Public Sector Entities
As public sector entities are also part of the ÒOther public agenciesÓ sector, their
credit assessment should also rely on a data set similar to the one used for
regional governments and local authorities. However, such assessments should
also take any possible group interdependences into account, as such relationships
may have a substantial impact on the repayment of loans in the ÒPublic sector
entitiesÓ segment. In some cases, data which is generally typical of business
enterprises will contain relevant information and should be used accordingly.
14 Guidelines on Credit Risk Management