Implicit rating: A potential new method to alert crisis on the interbank lending market

- Each bank's counterparty risk can be estimated from transactional data with the proposed “implicit rating” measure based on partner limits and interest rates.
- The method is applied to the detailed network data of the Hungarian interbank market between 2003 and 2012.
- Quantity adjustments were found to be dominant over price adjustments.

A new measure called “implicit rating” is introduced as a potential component of an early warning system. It relies on the aggregation of experts' knowledge hidden in transactional data of the interbank market of unsecured loans. Banks simultaneously assess each other's creditworthiness which is reflected in partner limits and interest rates. In the Hungarian interbank market the overall trading volume and the average interest rate showed no negative trends before the crisis of 2008; however, the average implicit partner limit started to decrease several months earlier, hence it might serve as a stress indicator both at system and bank level.