Migration Analysis of Credit Risk in Tunisian Banking Sector

In this paper, credit migration matrices are built to measuretransition probabilitiesat Tunisian credit institutions, allowing a comparison of credit risk quality shiftsfor public banks, private banks and leasing companies. We proposeto apply estimating Markov transition matrices using proportions data in order to be adapted to the scarcity of individual dataonloan quality transitions. We employ annual classification of assets issued in theregistration documents and annual financial reports during 2003-2014 period.It’s found from the analysis that the risk grade 2 has the greater tendancy to be downgraded than to be upgraded in public banks and in leasing companies.For the other risk grade 3, the upgradation in the category is higher than the downgradation in all cases. The resultsindicate that the public banks are the riskiest credit institution in Tunisia and there is a lack of rigor in loan classification inpublic and private banks. The findings are useful and critical for supervisory purposes and foroptimizing bank credit risk management.

Effects of business maturity, experience, and size on farms economic vitality

Purpose The purpose of this paper is to examine the relative financial strength and endurance of several paired classes of farmers according to business maturity (beginning versus mature farm businesses), farm operators’ age/experience (young versus older, more experienced farm operators), and farm size (small vs large farm businesses) by utilizing random-effects ordered logistic techniques. Design/methodology/approach This study uses a credit migration approach to analyze the factors that impact the probability of farm credit migration rates. An ordered logit model is used to assess the influence that factors have on a farm upgrading, staying same, or downgrading in credit rating. Findings Results show that increasing farm size will lead to a higher probability of class upgrades. Being a young farm operator, meanwhile, decreases this probability. Positive changes in money supply and farm real estate values were found to increase the likelihood of credit upgrades. Results also show trend reversal of credit risk movement, where upgrades (downgrades) are more likely to be followed by downgrades (upgrades). Originality/value With farms being dependent on capital for growth, knowing what factors affect the ability of a farm to obtain credit lends insight in the agricultural credit markets. This paper is also the first to assess the impacts of these factors on small farms which constitute 92 percent of farms in the USA per the US Department of Agriculture.

CREDIT RISK VALUATION WITH RATING TRANSITIONS AND PARTIAL INFORMATION

This work intends to shed some light on a new use of Phase-type distributions in credit risk, taking into account different flows of information without huge numerical calculations. We consider credit migration models with partial information and study the influence of a deficit of information on prices of credit linked securities. The transitions through the various credit classes are modeled via a continuous time Markov chain but they are not directly observable by investors in the secondary market. We first consider the case of one bond issuer and study three settings of partial information. In a first model, information about ratings arrives at predetermined dates with delay periods. In a second model, information arrives randomly according to an exogenous Poisson process, whereas in a third model, information arrives randomly according to an endogenous rule (transitions are observed only when they lead the Markov chain to a class with a lower credit rating). We infer in the three settings bonds and options prices, and we provide an explicit description of the dynamics of bond prices under real and pricing measures. We also consider the case of several bond issuers. We first study a model for two different issuers and analyze the cross effects of deficit of information and contagion on bonds prices and correlation of default times. We then propose a model for several homogeneous issuers. Finally, numerical illustrations show the relevance of taking into account deficits of information on prices of credit linked securities.