Static and Dynamic Models for Credit Risk Assessment: Initial Findings of an Empirical StudY

The application of the Basel 2 rules regarding credit risk management highlights the problem of constructing the ratings’ criteria, and, in particular, the credit risk assessment methodology used. The latter regards both that adopted in the scoring, if used in the bank, and the one supplied directly in the analyst’s judgment. The Italian financial actors have strongly debated the topic of the ratings’ application, with considerably opposing views, based more on the topic of credit rationing danger than the quality of customer relationships. In a country such as Italy, that has years of experience in multibanking and weak customer relationships, little or no attention has been paid to the quality of the data used for loan analysis. Above all, however, even less attention has been paid to the methodological approaches and the relative techniques adopted. In this paper the methodological soundness and the capability of highlighting/forecasting enterprise crises have been verified by making reference to two different analytical approaches. The first one is based on the instruments traditionally used by Italian banks (static analysis with the use of ratios) and the second one constructed on the methodology of cash flow analysis (dynamic analysis). The aim of the latter is to measure the evolution of an enterprise’s financial requirements. The two models have been verified using a sample of 480 enterprises, half of which were subjected to bankruptcy proceedings and the other half in bonis. The empirical research has been carried out using a typical company-minded approach, given that the analysis techniques for the appraisal of creditworthiness mainly adopt such a matrix. The present paper presents the initial findings which resulted from the use of statistical analysis tools, confirming other authors’ conclusions on the ratio analysis still dominant in the banking praxis, and showing its total unreliability. Although the use of dynamic models allows the measurement of the nature and causes of an enterprise’s financial requirements, it cannot determine with precision the reasons behind businesses’ financial troubles. In fact, the analysis has revealed very different enterprise behaviour on the eve of the crises, originating from motivations which cannot be defined according to pre-existing schemas. At the same time the Italian system quite often 2 neglects certain ratios which could provide extremely relevant information. First of all those regarding sector analysis and those referring to cash flow measures and determinants, in particular the operating income and the changes in net working capital. In general, the initial findings of the study have highlighted both the necessity for further efforts involving multivariate statistical analysis, as well as increased efforts in identifying the dynamic models, where the latter are used with the aim of delineating a trend and are not limited to static valuation. This conclusion once again confirms the necessity for lending banks to invest in the quality of relations and in the continuous monitoring of the aforesaid.