|dc.description.abstract||This thesis explores the modelling for Internal Rating Based (IRB) of Credit Risk
for Small and Medium Enterprises (SMEs) as required for implementation of Basel
II Accord. There has been limited previous research for this important sector of the
economy. There are two major approaches: Accounting Based and Merton Type, and
these are compared.
To make the comparison initially a small sample is considered and simulation is
used to explore the use of the two approaches. The study indicates some of the
limitation of analysis for both Accounting Based and Merton Type approaches, for
example the issue of colinearity for the Accounting Based approach and lack of
trading of SMEs’ equity affecting the Merton Type approach. A large sample is then
investigated using standard Credit Scoring approaches for the Accounting Based
modelling. Different definitions of default and distress are considered to overcome
the problem of low number of defaults. These approaches are found to be viable.
Merton Type model is then compared to benchmark models from the Accounting
Based approach. The predictions are compared over differing time horizons. It is
found that Merton Type models perform well within a limited period compared to the
Accounting Base approach.
Overall, credit scoring models demonstrated better performance when the sample
group included a considerable number of ‘Bad’ firms or cutoff point was selected so
that an acceptance rate was relatively low, otherwise model’s predictive accuracy
would decline. Merton model presented better predictive accuracy with higher
acceptance rates. Credit scoring models was able to give early signs of default year.
In addition, one may take into consideration that if the company is going to decline
credit quality or raise default probability this year, Merton type models can be
helpful in adjusting credit rating. When considering a loan to a company, a bank
wants to know the likelihood default for duration of loan. In this sense Merton
models is only useful for a relatively short loan terms.||en
|dc.publisher||The University of Edinburgh||en
|dc.subject||Merton Type model||en
|dc.title||SMEs Credit Risk Modelling for Internal Rating Based Approach in Banking Implementation of Basel II Requirement||en
|dc.type||Thesis or Dissertation||en
|dc.type.qualificationname||PhD Doctor of Philosophy||en