Sorry to be pedantic here, Snoopy, but does the RBNZ "accept" credit ratings as distinct from "noting" them? Where would they go if another ratings agency came up with a different rating, as is sometimes the case in other industries/markets?
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Sorry to be pedantic here, Snoopy, but does the RBNZ "accept" credit ratings as distinct from "noting" them? Where would they go if another ratings agency came up with a different rating, as is sometimes the case in other industries/markets?
Heartland got their own BBB credit rating from Fitch, IIRC.
I seem to recall Jeff Greenslade saying they were not seeking a 'second opinion'. So by my reckoning that means the Reserve Bank has 'accepted' it. If the Reserve Bank had merely 'noted' the opinion, it suggests that they might be on the look out for another rating to either confirm or contradict Fitch. But the Reserve Bank have not asked for a second opinion. By my reckoning this means the Reserve bank have 'accepted' the Fitch rating, and all the predicted consequences, -good and bad- , that flow from that Fitch rating.
SNOOPY
Credit rating , don't get me started ......
https://en.wikipedia.org/wiki/Credit...ubprime_crisis
Good post. People need to keep in mind that credit ratings for banks must be investment grade, minimum of BBB- and maintained as such.
The most recent and most spectacular failure of an investment grade financial institution was South Canterbury Finance which was rated BBB- the same rating as the Cooperative bank and only one notch below HBL.
I have witnessed some sloppy math on here regarding probability and the one in 30 chance of default over a 5 year period. If you roll a six sided dice six times you are not guaranteed to roll a 6 even though you have 6x 1:6 chances. There's something called independence of events.
"A basic assumption in probability theory is that each event is independent of all other events. That is, previous draws have no influence on the next draw. "
This means that if Heartland doesn't default in the course of a year the probability of it defaulting the next year does not increase.
The approximate, median likelihood that an investor will not receive repayment on a five-year investment on time and in fullbased upon historical default rates published by each agency.
Adequate BBB Baa BBB 1 in 30
I don't disagree with anything you have written above regarding probability theory Axe.
But I do think that in relation to any particular example (in this case Heartland) that just because you are applying probability theory, that doesn't mean that all years in which Heartland operates neatly organize themselves into "independent events." For example, consider Heartland's non-core property portfolio.
If the bad property is a drag on the company one year, and there is no significant improvement in selling down that portfolio or writing it down over that year, then it will be a drag on the company the next year too. IOW because loans 'span the years', this means that successive years in which Heartland operates are clearly not independent of each other.
I would imagine the statisticians who draw up these loan ratings know that each business year of Heartland is not independent of the next. So they will have adjusted their risk model to compensate. To give a very simple (oversimplified for any reality, but useful for explaining the concept) example of this to make the point.
Consider 30 years of a financial institution in business, made up of two types of years: 'good' years and 'bad' years. Let's assume for the purposes of this example that there are an equal number of 'good' and 'bad' years. Let's assume that the chance of going bust in a 'bad' year is 1 in 15. Let's further assume that the chance of going bust in a 'good' year is 1 in 45. Because there are an equal number of 'good' years and 'bad' years the average chance of going bust when any year is picked at random, with no knowledge as to whether that year is good or bad, is 1 in 30. Spookily similar to a finance institution with a BBB rating!
So when you see a BBB rating applied to a finance institution like this, what is the chance that in any particular year the chance of going bust is 1 in 30? There is actually no chance at all that this will happen! But that doesn't mean the 1 in 30 year risk ratio when applied to this particular financial organization is wrong.
SNOOPY