The text contains a 'Comparative Analysis of Internal and External Credit Ratings'. It compares and explains both concept, and concludes what impact both have on the Mid-Market Companies in Germany.
In 2012, mid-market companies (KMU) based in Germany generated revenues of 2,149.0 billion Euros. They are responsible for 35,3% of all revenues generated in Germany. These mid-market companies employed 15.97 million people, a workforce of 59,6% of all employees in Germany (IFM Bonn, 2014). Clearly, mid-market companies are elementary for the German economy. To continue to be a primary motor of the economy, they need sufficient funding. Nevertheless, financing for mid-market companies in Germany will become more difficult. Standard & Poor’s Ratings Services (2015, pp. 2-3) estimated that European mid-market companies are going to have difficulties to meet their financing needs, as banks reduce their lending to the mid-market sector as consequence of stricter regulations. Especially, smaller mid-market companies face problems to access credit loans (Standard & Poor's Financial Services LLC, 2014, p. 3). The reason for these difficulties is the implementation of Basel III. Financial institutions have to deleverage their business during the next years (Zainzinger, 2013). The problem is that mid-market companies traditionally relied on bank funding. Especially German mid-market companies relied on credit loans from financial institutions (Huber & Simmert, 2007, p. 167-196). The new regulations for deleveraging create a “scarcity of finance for European companies”; it will generate an acute financing problem for mid-market companies (Dimitrijevic & Wade, 2014, pp. 1-2). In 2013, the German mid-market financing gap already amounted to 38,9 billion Euros (KfW, 2014, p. 7). Therefore, these companies have to find new funding sources. They have to find solutions to improve the access to external financing. Credit ratings provide an opportunity to help in this process.
The existence of credit ratings is widely known. They often appear in several newspapers, and magazines (Handelsblatt, 2014). Nevertheless, various mid-market companies cannot estimate the impact and importance of credit ratings. Specifically, differences between internal credit and external ratings are often unclear. [...]
Table of Contents
- 1 Introduction
- 1.1 Problem Definition and Objectives
- 1.2 Course of the Investigation
- 2 Credit Ratings
- 2.1 Definition of Credit Ratings
- 2.2 Function of Credit Ratings
- 2.3 Development of Credit Ratings
- 3 External Credit Ratings
- 3.1 Producer of External Credit Ratings - Credit Rating Agencies
- 3.2 Regulations of External Credit Ratings
- 3.3 General Credit Rating Process
- 3.4 Credit Rating Process for a Mid-Market Company at Standard & Poor's
- 3.4.1 Methodology of Mid-Market Company Evaluation
- 3.5 User of External Credit Ratings
- 3.6 Criticism of External Credit Ratings
- 4 Internal Credit Ratings
- 4.1 Producer of Internal Credit Ratings - Financial Institutions
- 4.2 Regulations for Financial Institutions
- 4.2.1 Basel I
- 4.2.2 Basel II
- 4.2.3 Basel III
- 4.3 Rating Process of Internal Credit Ratings of Mid-Market Companies
- 4.3.1 Analysis of Quantitative Factors
- 4.3.2 Analysis of Qualitative Factors
- 4.3.3 Other Influencing Factors
- 4.3.4 Adjustment of Internal Credit Ratings
- 4.4 Use of Internal Credit Ratings
- 4.4.1 Credit Decision
- 4.4.2 Costs of Debt
- 4.5 Problems of Internal Credit Ratings and Their Assessment
- 5 A Comparative Analysis of Internal and External Credit Ratings
- 5.1 Motivation of Credit Ratings
- 5.2 Use, Risks, and Transparency of Credit Ratings
- 5.3 Cost of Credit Ratings
- 5.4 Assessment of Credit Ratings
- 5.5 Accuracy of Credit Rating Assessment
- 6 Impact of Credit Ratings for Mid-Market Companies in Germany
- 6.1 Definition and Situation of Mid-Market Companies in Germany
- 6.2 Necessity of External Financing for Mid-Market Companies in Germany
- 6.3 Risks of External Credit Ratings for Mid-Market Companies in Germany
- 6.4 Opportunities of External Credit Ratings for Mid-Market Companies in Germany
- 6.5 Requirements for Positive Credit Ratings for Mid-Market Companies in Germany
Objectives and Key Themes
This thesis aims to comparatively analyze internal and external credit ratings and their impact on mid-market companies in Germany. The study investigates the processes, regulations, uses, and criticisms of both rating systems. * Comparison of internal and external credit rating processes. * Regulatory frameworks governing credit ratings in Germany. * Impact of credit ratings on the financing options of mid-market companies. * Risks and opportunities associated with credit ratings for mid-market firms. * Analysis of the accuracy and assessment of credit ratings.Chapter Summaries
1 Introduction: This introductory chapter sets the stage for the thesis by defining the research problem and outlining the objectives of the study. It details the approach and methodology used to compare internal and external credit ratings, focusing specifically on their impact on mid-market companies within the German economic context.
2 Credit Ratings: This chapter provides a foundational understanding of credit ratings, defining them, explaining their functions within the financial system, and tracing their historical development. It lays the groundwork for the subsequent chapters by establishing a common understanding of the core concept of credit ratings and its significance.
3 External Credit Ratings: This chapter delves into the specifics of external credit ratings. It examines the role of credit rating agencies, regulatory frameworks, and the rating process itself, with a particular focus on Standard & Poor's methodology for evaluating mid-market companies. The chapter also addresses criticisms leveled against external credit rating systems.
4 Internal Credit Ratings: This chapter shifts the focus to internal credit ratings, exploring their creation by financial institutions and the regulatory environment shaped by Basel I, II, and III accords. It details the internal rating process for mid-market companies, considering quantitative and qualitative factors, and analyzes the applications and potential problems associated with these internal assessments.
5 A Comparative Analysis of Internal and External Credit Ratings: This chapter directly compares and contrasts internal and external credit rating systems. It analyzes the motivations behind the use of both, investigates the associated risks and transparency levels, explores the costs involved, and critically assesses the accuracy of the resulting ratings. The chapter synthesizes the findings from the preceding chapters to highlight key similarities and differences.
6 Impact of Credit Ratings for Mid-Market Companies in Germany: This chapter focuses on the practical implications of credit ratings for mid-market companies in Germany. It defines the characteristics of this segment of the German economy, examines the necessity of external financing, and analyzes both the risks and opportunities that credit ratings present to these firms. It also outlines the requirements needed to achieve positive credit ratings.
Keywords
Internal credit ratings, external credit ratings, credit rating agencies, mid-market companies, Germany, Basel accords, financing, risk assessment, regulatory frameworks, Standard & Poor's, financial institutions, SME, KMU.
Frequently Asked Questions: A Comprehensive Language Preview of Internal and External Credit Ratings for Mid-Market Companies in Germany
What is the main focus of this document?
This document provides a comprehensive overview of internal and external credit ratings, focusing specifically on their impact on mid-market companies in Germany. It compares and contrasts the two rating systems, examining their processes, regulations, uses, criticisms, and overall effects on access to financing and risk assessment for these businesses.
What topics are covered in the Table of Contents?
The table of contents covers a range of topics, starting with an introduction and problem definition. It then delves into the specifics of credit ratings, differentiating between internal and external systems. The document also explores the regulatory frameworks (including Basel Accords), the rating processes themselves (with a detailed look at Standard & Poor's methodology), the uses and criticisms of each system, and a comparative analysis. Finally, it analyzes the impact of credit ratings on mid-market companies specifically within the German context.
What are the key objectives and themes of the study?
The primary objective is to comparatively analyze internal and external credit ratings and their impact on mid-market companies in Germany. Key themes include comparing the rating processes, analyzing the relevant regulatory frameworks in Germany, investigating the impact of ratings on financing options, assessing the associated risks and opportunities, and evaluating the accuracy of credit rating assessments.
What are the chapter summaries?
The document provides summaries for each chapter. Chapter 1 introduces the research problem and objectives. Chapter 2 defines credit ratings and their historical development. Chapter 3 details external credit ratings, focusing on credit rating agencies, regulations, and the rating process, including Standard & Poor's methodology. Chapter 4 covers internal credit ratings, including regulations (Basel I, II, III) and the rating process within financial institutions. Chapter 5 compares and contrasts internal and external ratings across several criteria. Finally, Chapter 6 analyzes the impact of credit ratings on mid-market companies in Germany, considering their financing needs, risks, and opportunities.
What keywords are associated with this document?
Key terms include: Internal credit ratings, external credit ratings, credit rating agencies, mid-market companies, Germany, Basel accords, financing, risk assessment, regulatory frameworks, Standard & Poor's, financial institutions, SME, KMU.
What is the target audience for this document?
This document is intended for academic use, allowing for the structured analysis of themes within the context of credit ratings and their effects on mid-market companies. The detailed information and comparative analysis make it suitable for researchers, students, and professionals interested in finance, risk management, and the German economy.
Where can I find more information on this topic?
Further research can be conducted using the keywords provided, focusing on academic journals, industry reports, and publications from regulatory bodies such as the European Central Bank (ECB) and the German Federal Financial Supervisory Authority (BaFin).
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- Kevin Elsäßer (Author), 2015, A Comparative Analysis of Internal and External Credit Ratings, Munich, GRIN Verlag, https://www.grin.com/document/333723
