Default Probabilites for GlobalRating Group

 Risk managers using quantitative techniques require default probabilities to be assigned to ratings. Responding to client requests, we have compiled a table of default probabilities and their mapping to GlobalRating ratings.

Before applying any default probability data from any rating agency in the world, we recommend analysts consider the scientific requirements needed for statistical validity and the issues listed below.

As the legal system in Russia evolves, we are seeing some counter-intuitive judgements, but the need for a good lawyer to avoid problems is becoming quite clear. The bank guarantee, something explicitly laid down in the Civil Code, would seem to be immune from problems, but it is not.

A natural consequence of periods of economic stress are conflicts over contractual agreements and what they mean in law. 2009 has seen an unprecedented number of rouble bond defaults - some 200 - compared to zero prior to 2008. The result has been a slew of court cases, some leading to absurd legal judgements. Nevertheless, case history demonstrates how and where lawyers must pay special attention in defining the covenants for rouble bonds.

(Comment commissioned by Editor, Russian version to be published in BDM, No 12, December 2009)

Crises show up weaknesses, but they also highlight strengths. The Global Credit Crisis has had some very positive results for Russia. It has been possible to deal with weaknesses that were known for some years and the crisis catalysed reforms. The strengths of Russia's financial system were demonstrated, which will have an effect on investor sentiment for a considerable period of time. Yet there have been some subtle developments that may terrify us in future years.

Gazprombank is the first to issue hybrid capital - half a billion dollars worth. But the transaction is as transparent as mud!

The Central Bank of Russia released its October statistical review (http://www.cbr.ru/analytics/bank_system/obs_090901.pdf). Charting some of these data confirms our general view of the banking sector.

Deutsche Bank recently indicated it is to increase its retail presence in Russia. We expect this to mark a resurgence in retail banking in Russia after growth in the sector faltered due to the crisis.

In Why are Banks Hoarding Cash, we give an explanation for a substantial change in asset allocation strategies of a bank in a time of crisis. The indifference curves were presented without any justfication. Here we show how a change in the utility banks have for cash on the balance sheet changes the indifference curves.

This article describes a graphical visualisation technique for creating a field of indifference curves. Indifference curves are a classical tool in economics for describing a variety of behaviours and can be used to show why banks are hoarding cash during the current global crisis. The following technique appears to be original and constructs the indifference curves from two utility functions, one for each of the goods.

During a seminar marking the 20-th anniversary of the Supervisory function of the Russian Central Bank, Vice-Chairman Gennady Melikyan touched on macroeconomic supervision and the shamelessness of some Russian bankers. These issues are important to an understanding about the way the Russian banking system will evolve.