Evaluation of rating systems

Since the publication of the initial consultative proposal of a new Basel capital accord in June 1999 (and latest proposal from summer 2004) the influence of the proposed changes in bank management has been discussed intensively. Especially, the possibility to forecast insolvencies is one of the most relevant questions in many empirical studies. In this paper, we present an evaluation methodology for quantitative rating systems. As an example, we use the well known logistic regression model in order to demonstrate the evaluation methodology proposed and we discuss the results obtained in detail. Any other method (statistical or artificial intelligence methods, e.g. neural networks, fuzzy logic) can be evaluated in the same manner. As a side effect, the approach proposed might lead to improved forecasting results.