A Not So New New Rating From Moody’s

Agencies, Definitions, Scales

Moody’s Investors Service is seeking feedback by May 05, 2022 from market participants on proposed changes to its Banks Methodology. The key proposed revision is to introduce new ratings that exclude government support (XG ratings) in Moody’s methodology for banks. The rating agency is currently collecting comments and opinions from market participants.

Hence a remark on the one hand on the history of this approach and on the other hand on the problems that arise in practical application:

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DEXTRO’s New Risk Class Methodology

Definitions, Symbols

A new risk class methodology with seven risk classes (RK1 to RK7 similar to MiFiD II or SRRI) and at the same time emancipation from the dogma of “historical volatility” should determine the risk ratings of the DEXTRO Group in the future, which will continue to be based on the pillars of forecast risk / return volatility, capital loss probability and total loss probability.

The current concept of the SRRI (Synthetic Risk and Reward Indicator) provides for seven risk classes. The SRRI provides the risk and reward indicator for mutual funds and is a helpful metric for investors.

According to the requirements of the small investor protection and the European legal regulations, fund companies have to show the risk indicator. In Germany, this is usually done in the sales prospectus or other sales documents of a fund, especially in the so-called “key investor information” (“WAI” or “KIID”).

This approach is considered sensible and welcomed by the DEXTRO Group. The DEXTRO Group is adapting the risk classification accordingly. The new regime from January 2022 offers a differentiated view with seven levels compared to the previous WpHG standard with five risk classes.

The process of risk classification of financial investment products (e.g. AIF participation, equity ETF, bond or subordinated loan) is analogous to the rating process and is based on its results. In contrast to the rating determination, however, the risk classification focuses on the consideration of the risk components of an investment product and subjects these to a comparison with the typical financial investment products of the respective risk classes.

Previously: WpHG risk classes RK1 (very low) to RK5 (very high)

New: DEXTRO Group’s risk indicator in risk classes RK1 (lower risk to 7 (higher risk).

In the new regime of the DEXTRO Group, the classification for funds without historical data is not limited to risk classes RK5 to RK7. In particular, the characteristics of the categories of capital loss and total loss probability can be significantly differentiated between different investment products in the new RK regime with seven levels. Blind pool concepts without a track record of the asset manager are primarily to be expected in risk class RK6.

Various variables form the core of the risk classification as criteria and have an influence on the end result:

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A Hurdle of Practical Importance

Definitions, Modifiers, Scales, Symbols

The clear divide between investment-grade and speculative-grade debt markets dates back decades.

A number of central banks make their bond purchase programs dependent on minimum credit ratings. These are often operationalized by specifying rating symbols, such as the rating symbols Baa3 or BBB-. When a rating agency tries to win paid orders from issuers by giving benevolent ratings above this threshold, it is damaging the system on a very fundamental level. The rating agency Moody’s Investors Service has now presented an in-depth analysis with which it shows – inter alia – why it takes this threshold so seriously.

“Between the 1930s and the late 1970s,” tells Moody’s, “investment-grade companies issued almost all public bonds in the US, and the speculative-grade (or high-yield) bond market consisted solely of companies that had been downgraded out of investment grade (i.e., fallen angels).”

According to Moody’s, it was not until the early 1980s in the US, and later outside of the US, that a robust speculative-grade public bond market emerged and grew rapidly, fueled mainly by private equity-sponsored leveraged buyouts. Since the 1980s, the high-yield market has continued to expand as its own asset class with distinct investor groups. As a result, a clear divide has been maintained between the investment-grade and speculative-grade debt markets.

The classification is still at least as important today as it was in the past. Increases in credit spreads and losses at the investment-grade/speculative-grade divide are relatively large. One factor underlying the importance of this divide is the relatively large percentage changes in corporate credit spreads and losses when moving from investment grade to speculative grade, and vice versa.

“The percentage increase in spreads moving from Baa3 to Ba1 is materially larger than at almost all other points on the rating scale,” says Moody’s, “both in the first half of 2021 and over a longer period from 1991 through 2020.” Another finding in Moody’s report: “The investment-grade and speculative-grade divide delineates a difference in historical credit losses between Baa3- and Ba1- rated nonfinancial companies that is larger than at most other points on the rating scale.”

According to the data published by Moody’s, these relatively large differences across the Baa3/Ba1 divide are long-standing. “Regulations and portfolio governance rules that hinge on the distinction between investment-grade and speculative-grade ratings have led to these differences and have driven differences in financial policies and liability structures.”

See Moody’s Investors Service, Sector In-Depth: Corporates – Global, A closer look at the investment-grade / speculative-grade divide.

Rating Forest Investments

Criteria, Definitions, Investors, Read

Understanding the importance of sustainability has popularized an asset class that used to be reserved for the state, churches and nobles. Forest – to be precise its wood – has always served people as fuel, product and building material. Forest has now become the epitome of sustainable investments. The idea of sustainability emerged in a time of crisis and scarcity. Around 1700, the mining industry and livelihood of thousands was threatened in Saxony. The problem was an acute scarcity of timber. The mining industry and smelting of ores had consumed whole forests. Trees had been cut at unsustainable rates for decades without efforts to restore the forests. In Germany, the term sustainability is associated with Hans Carl von Carlowitz. He was raised in and influenced by the aforementioned environment of wood scarcity. He traveled widely in his youth and learned much from the forced discipline of the French minister Jean Baptiste Colbert, who had enacted a forestry reform in France. Carl von Carlowitz’ view that only so much wood should be cut as could be regrown through planned reforestation projects, became an important guiding principle of modern forestry.

In this preliminary article you can learn more about some risks and rewards of buying forests and what you should consider when buying forests. Given the popularity of forest investments, the question arises as to which ratings are available to investors as decision-making aids. The first question to be asked is which instruments can be used by investors to tap into this asset class. The most common investments in forests are shares, direct investments or closed-end funds. Whereas in direct investments investors invest directly in one or more trees on specific areas and leave the management to a service provider, closed-end forestry funds are less individual.

  • A forestry share is a security which securitises a share in a stock corporation whose capital is invested to a large extent in forest property or wood processing. Primarily Scandinavian and North American forestry stock corporations are traded. There are no German forestry stock corporations with significant free float on the stock exchange. Buying forestry shares does not necessarily mean planting new trees.
  • A closed-end forestry fund or closed-ended forestry fund is a collective investment model based on issuing a fixed number of shares which are not redeemable from the fund. Unlike open-end funds known for corporate stock and bond investments, new shares in a closed-end forestry fund are not created by managers to meet demand from investors. Instead, the shares can be purchased and sold only in the secondary market, which is the original design of the mutual fund, which predates open-end mutual funds but offers the same actively-managed pooled investments.
  • Direct investment in forest means becoming the owner of the forest yourself and thus acquiring all the rights and obligations of a forest owner. The investor needs to be able to maintain regular forest care. As a forest owner, you also have certain obligations, since you are legally obliged to ensure road safety. This means that all trees and branches that are located in places with increased traffic – for example on country roads or hiking trails – have to be felled or trimmed as soon as they pose an increased risk for humans. Buying forests also means taking responsibility.

The implications for the rating approaches to these investment alternatives are considerable.

Forestry shares being tradable on the stock exchange at any time are subject to extreme fluctuations in value. The valuation of most listed forestry shares has a history of having fluctuated by several hundred per cent. Such fluctuations in value mean that ratings of these stocks can quickly become out of date. In fact, a buy recommendation can turn into a sell recommendation within a day if the stock market price quickly exceeds the fair value. Most forestry share companies are predominantly wood processors, who are strongly affected by economic fluctuations and thus by fluctuations in pulp or timber prices. Therefore there is a strong dependence of many forestry shares on economic trends.

Direct forestry investments in precious woods, on the other hand, can react better to market fluctuations by postponing the harvest. The trees are left in the forest until the harvest is worth it – they become bigger, taller and more valuable every day. Fuctuations in precious wood prices have historically been significantly lower than those of timber or wood used for pulp production.

In Germany in particular, the very contradictory regulations must be observed. For decades, the German government has not consistently supported wealth creation through property acquisition. Pay attention to the municipality’s right of first refusal. In this sense, there are no secure legal bases for forest investments in Germany, because rights of first refusal can hinder both buying and selling. In addition, the following contradictions must be observed.

The yields generated from a direct forestry investment are generally tax-exempt while the price gains of forestry shares and forestry shares dividends are subject to the almost 30 per cent flat rate withholding tax including solidarity surcharge and church tax. On the other hand, the transaction costs are significantly higher than with stocks. In addition to the purchase price, land transfer tax, notary and fees, which often make up ten per cent of the purchase price, are added, thus significantly reducing the returns for forest investors. Property tax has to be paid annually and wood production in Germany is relatively expensive due to environmental regulations and certifications. In addition to the actual purchase price, there are also other costs when buying a forest which would not be part of the rating analysis of an independent forest rating. For example, you have to include the costs for the notary, usually 1.5% of the purchase price (the percentage can be higher for small areas) and the property transfer tax, around 4% – 6.5% of the purchase price. You must also not ignore the broker’s commission.

As a forest owner, you also have to pay additional costs.

Property tax, accident insurance and, if applicable, contributions from the soil and water associations are to be mentioned here. With the management of the area, the ancillary costs are always offset by possible income from the sale of wood.

Forest areas in other countries offer far higher returns, although buying forest in foreign countries can be difficult for foreigners. It is much easier to hire companies to lease or buy forests or fallow land in other countries, to manage them in order to generate yields for investors. The country rating must be taken into account for every investment abroad. The country rating is used to assess the economic, social and political risk that an investor will be prevented from receiving the income due to him.

Forest investment providers advertise the scarcity of forest. They argue, that the benefits of forestry investments are the growing demand for the raw material wood. Whether there are fewer and fewer forest areas and whether the demand for wood exceeds the supply has to be tested continuously.

Forestry investments are not always socially beneficial, especially when stock corporations and other big companies buy cheap land in foreign countries and perhaps even displace locals, or the price of land for local residents rises immeasurably as a result of land purchases. Forests are not always ecologically friendly. Thousands of hectares with cloned eucalyptus or teak planted in rows are no gain for nature. Many insecticides and pesticides that pollute and destroy the soil and the environment are sometimes used to increase output.

In any case, structurally rich forests with many different tree species offer a better and safer alternative to planted conifer monocultures that are based on only one tree species. Although these grow faster, they are also susceptible to storms, snow, ice and pests. Mixed forests of deciduous and coniferous trees are not only more stable and better adapted to climatic changes, they also allow you to react more quickly to changes in the demand for wood species on the market.

Any forest rating should also pay attention to the age of the forest. Young forests, in which there are only a few old trees, initially require more maintenance. Of course, they can more easily be designed according to your ideas. The young forest will initially generate little income from wood sales through its maintenance. Forests of old age with significantly taller and thicker tree trunks enable an early profit from the logging and sale, but require care for the new generation of trees.

Good soil and suitable tree species mean that larger quantities of wood of better quality can be expected in the long term.

This is likely to be reflected in the cost of purchasing the forest, especially if the seller has had the forest valued by an appraiser. Regardless of the quality of the soil, its location is a decisive criterion for price formation. So it depends a lot on where the forest is located. A forest area near Munich will therefore cost significantly more than a similar one in the countryside in Saxony-Anhalt. The standard land value is derived from the average price of areas sold in the area and, in addition to the special features of the forest area offered, serves as an aid to determining the actual value.

If the forest is well cared for and there is already a lot of high-quality wood to be expected on the area initially, then you should also expect higher costs. In any calculation, bear in mind that there are usually additional costs for managing the forest. So you cannot count the expected cubic meters of harvest one-to-one with the wood prices and use this to conclude the profit. If the area is difficult to access, the wood harvest is also time-consuming. If it is a particularly protected forest, for example in a nature reserve, then management is only possible to a limited extent. The ideal value of these forest areas is all the higher for one or the other, especially if rare animal and plant species live in this forest. You should therefore be clear about your goals in advance and only acquire forest if it fits your previously set goals.

In addition, a forest rating process should include a step in order to check any “contaminated sites”. For example, if the forest is on a former military site, the trees there may have been damaged or the ammunition in the ground has to be laboriously cleared.

All closed-end forestry fund investments have one risk factor: the long contract term. Even with sustainable forestry investments which respect human rights and the environment, the planted trees need lots of time to grow. On ecologically farmed land, they probably take even longer to grow than the fast-growing trees in monocultures, which are harvested earlier, to produce cheap pulp and biomass. During long contract terms, much can happen: companies can fall victim to mismanagement or go bankrupt, the regions in which the forests grow can become politically unstable.

Natural events such as fire, earthquakes, droughts or floods also have a lot of time to occur over the years.

Forestry investment are therefore right for investors in particular if they do not shy away from risks, have the necessary financial means and staying power until the trees generate returns. If you take over a neglected forest that does not promise stability and is therefore susceptible to pests or storms, that does not necessarily mean that it is a bad deal. Careless forest care can have a positive impact on the purchase price and there may be a lot of potential in your future forest. An unkempt forest can be a deterrent, but it is up to the investor to shape and maintain the forest. What possibilities are opening up in the forest and what additional costs have to be reckoned with for any maintenance measures? With almost every intervention in the forest, whether in well-tended or unkempt forests, financial resources are necessary.

Some native tree species have been planted in the wrong locations in the past. This can result in poor growth, instability and increased susceptibility to damage. To select tree species that are appropriate to the location requires a lot of expertise. To increase the stability of a forest and make it fit for the next centuries requires a forestry rating first.

Ecological goals or enjoying forest ownership are important motives for some investors. Because while it has a personal value for some, only the regularly generated income plays a role for others. However, if one compares direct forest investments with other investment options such as stocks, then short-term gains are generally not to be expected. Every rating approach for direct forest ownership has to take this into account. Forest ratings are possibly the ratings with the longest time horizon. Long-term bond ratings – for comparison – usually only refer to a forecast period of four to five years.

Forests give us the sustainable resource wood, which will also be of ever greater importance in the coming generations.

That makes the forest relatively stable as a system. However, for a fast growing return, other investment methods are a better alternative. So buying a forest is a decision that should be made not only for financial reasons, but also for a certain amount of idealism and enjoyment of nature. Forest investors are similar to investors who invest for ethical, ecological or social reasons.

Forest has been in great demand in Germany for a number of years and has often been family-owned for generations. In addition to the forest exchange, there are a few other real estate portals and tender platforms on the Internet that also offer forest. Depending on the respective provider, there may be costs for registration or an application. In some cases, brokers are also placed between the buyer and seller from the outset.

A responsible forest office or an auction houses in the area, the member newspapers of forest owners’ associations for forest pieces on offer or the advertising section of the regional newspapers might provide information on forest for sale. With currently estimated 1.9 million forest owners in Germany, investors are also well advised to ask around in their private or professional environment. The chance that you have forest owners in your circle of friends is quite high.

The IC Rating™ Model by Intellectual Capital Sweden

Definitions, Models, Read, Systems

Intellectual Capital comprises all factors critical to an organization’s future success that are not shown in the traditional balance sheet.

If you are looking for a rating approach to intellectual capital (IC) that fits that definition, this article is still the right read for you:

The IC Rating™ model by Intellectual Capital Sweden
Kristine Jacobsen, Peder Hofman‐Bang, Reidar Nordby Jr
Journal of Intellectual Capital
ISSN: 1469-1930
Publication date: 1 December 2005 

The Intellectual Capital model is originally based on ideas put forth by Sveiby (1997) indicating a division in internal, external and market assets, and the groundbreaking work done by Leif Edvinsson at Skandia in the beginning of the 1990s (Edvinsson and Malone, 1997). Most IC models today use this division, but the words and details might vary. The IC Rating™ model provides important inspiration for investors who are interested in impact investing, social investing and sustainability.

The IC Rating model contains three main areas of IC:

  • organizational structural capital,
  • human capital and
  • relational structural capital.

The value of the article is, among other things, that it develops a taxonomy that is relevant today and probably also in the future. The model creates order by defining elements and showing relationships between the elements. On the one hand, these are abstract enough to be generally valid, on the other hand, concrete enough to lead to a practical result.

The reader of the article will understand why a company’s intellectual capital is not just the sum of the knowledge of its employees. Instead, it is key to capture that knowledge in the company’s structures, so it is transferred from individuals, to groups, to the entire organization and becomes part of the organization’s “structural” capital.

The IC Rating™ gives the company a better understanding of non-financial assets and their importance in the company’s value creation. Intangible assets behave differently to financial and monetary assets, and should therefore be treated differently. The rating brings new insights into how businesses change and perform and how intangibles interact to create value.

The taxonomy provides for a shared language and terminology, therefore assuring a structured and pedagogical way of discussing and understanding a concept that is often perceived as blurry and unclear. A better internal management of IC and translation of a business strategy into actionable results are the consequences. As with any meaningful asset rating it helps the management make intelligent trade-off decisions with regards to investments. Companies never have unlimited funds to invest in the company and the results of an IC Rating™ will give clear indications where the investments will give the best return.

monk surrounded by children

Is The Notion of Efficiency Alien to Charity?

Comments, Criteria, Definitions, Methodologies, Read

there are minimum requirements for recognized non-profit organizations. But can their efficiency and effectiveness also be rated?

At effektiv-spenden.org Sebastian Schwiecker, founder and managing director of UES – Gemeinnützige Unternehmergesellschaft (haftungsbeschränkt) für effektives Spenden, tries to give very specific answers to the question of how you can achieve the greatest possible effect with your donation, i.e. where you can help most for each euro.

He believes that the mission of his company is unique in Germany. Although there are two institutions, the German Central Institute for Social Issues (DZI) and PHINEO that assess charity organizations, Sebastian Schwiecker points to fundamental differences in the approach to effektiv-spenden.org.

The DZI, founded in 1893, has been awarding the DZI donation seal since 1992. To obtain this, an organization must undergo an annual audit. If the DZI standards are adhered to, the organization receives the DZI donation seal for the next 4 quarters. The following three are the main points:

  • The fundraising campaign is true, clear and factual.
  • The donations are used purposefully, economically and economically.
  • The organization has functioning planning and control.

Sebastian Schwiecker does not question, that these are criteria that must be met by an organization that wants to provide sustainable, highly effective aid. However, they are not sufficient, says Sebastian Schwiecker, since it would be necessary to examine the effect achieved by the respective aid organization and to put this in relation not only to the costs, but also to other organizations. The DZI does not do either. The information available online about the organizations with the DZI donation seal is limited. On the profile of the World Vision organization, whose total income in 2018 was more than 114 million euros, the full paragraph on the use of funds reads as follows (translated from German):

The share of advertising and administrative expenditure in total expenditure is appropriate according to the DZI standard (“appropriate” = 10% to less than 20%). The effectiveness of the use of funds is checked, and the results are documented and published.

The DZI itself does not examine the effect achieved, Sebastian Schwiecker criticizes and considers the publicly available information as very scarce with less than 500 words per audited organization. For comparison, Sebastian Schwiecker mentions the evaluations by GiveWell on which the recommendations of eeffektiv-spenden.org are based. Here even some of the often more than 100 footnotes are longer than the complete organizational profiles on the DZI website.

Due to this superficial view and the – in the eyes of Sebastian Schwiecker – large number of organizations with the DZI donation seal, most recently well over 200, interested donors are only given limited orientation. Sebastian Schwiecker cautions that the designation of the DZI as “donation TÜV”, which is often used in the media, may be appropriate, but one should be aware that the task of the TÜV is to exclude unfit vehicles from road traffic and not to judge what is best in relation to its costs.

The situation is different with the PHINEO consulting company founded in 2009. Since 2010, it has been awarding the so-called Wirkt-Siegel, which differs from the DZI donation seal primarily in that it carries out a “differentiated assessment of the potential for impact and the quality of the project”. On the one hand, PHINEO concentrates exclusively on projects that are active in Germany. In this way, the most effective approaches from the perspective of effektiv-spenden.org are excluded from start, although even more than in Germany might be achievable with every euro in very poor countries. On the other hand, PHINEO does not compare the audited organizations with one another, argues Sebastian Schwiecker.

If a donor does not want to be satisfied with contributing to positive change at all, but rather pursues the goal of moving as much as possible and as effectively as possible with the resources used, the Wirkt-Siegel offers little support, Sebastian Schwiecker points out, although he admits that he could not claim scientific objectivity for his approach. “But we are firmly convinced that ceterus paribus it is better to help more people than less. To do this,” reads his website, “one has to start by asking the right question, which is who should I support to maximize my impact? So far, nobody in Germany has done that. We want to change that!”

How A Credit Rating Agency Should Determine the Weights of ESG Criteria

Agencies, Criteria, Definitions, Methodologies, Read

Moody’s “General Principles for Assessing Environmental, Social and Governance Risks” relate to issues which may have greater downside risk than upside potential for rated issuers. The introduction of these principles is perceived by many issuers as an additional pressure that weighs on them in order to prove their sustainable management. This pressure is unsettling, especially since eco-activists seem uncessantly to come up with new ideas about what additional requirements companies should meet. However, Moody’s methodology shows what rational consideration is all about.

As an example, a company with a track record of health and safety violations may face litigation risks that pressure its operating income, whereas another company that demonstrates outstanding health and safety practices may not see a comparable credit benefit.

Environmental, Social and Governance (ESG) considerations are not always negative; they can be credit strengths. A company or government that has outstandingly strong governance is more likely to have a management culture of 360-degree risk assessment and informed decision-making, which support long-term creditworthiness. Due to the relatively low incidence of ESG strengths that are meaningful to credit profiles, they are also more likely to be considered in other rating considerations outside of a scorecard, but there are exceptions. An example is the business profiles and cash flow stability of renewable energy developers. They may benefit from supportive government policies.

The term ESG refers to a broad range of qualitative and quantitative considerations that relate to the sustainability of an organization and to the broader impact on society of its businesses, investments and activities. Examples include a company’s carbon footprint, or the accountability of a company’s management or a nation’s government.

The criteria used by ESG rating agencies vary widely. Investors as well as issuers complain about the different assessments. In particular, there are no standards by which the correctness of ESG ratings can be objectively checked. The arguments ultimately remain tautological: If arms production is deemed unethical, then companies receive a poor ESG rating if they manufacture weapons. The “performance” of the ratings of an ESG rating agency is good if it has correctly identified companies that manufacture weapons. But whether the underlying dogma is correct is not discussed.

The classification of ESG considerations across financial markets is imprecise, due largely to the multiple and diverse objectives of various stakeholders. Ethical judgments differ massively, even if they have common roots, as in the case of the three world-leading religions of Abraham. Leading credit rating agencies like Moody’s therefore do not get involved in the moral discussion. Instead, they are focused on the aspects of ESG that can have a material impact on the credit quality of an issuer.

Several institutions, notably the Principles for Responsible Investment and the Sustainability Accounting Standards Board, have sought to establish voluntary definitions for ESG, but at this point there is no single set of ESG definitions or metrics that is comprehensive, verifiable and universally accepted. It is not just Jewish, Muslim and Christian approaches that differ. There are thousands of differences among Christians alone. Arbitrary definitions of human rights, fundamental rights, etc. are the result. Legal definitions are therefore only the result of political negotiation or enforcement processes in a political trial of strength and should not be confused with something scientifically observable in nature.

Therefore, the definition of ESG issues is also dynamic because what society classifies as acceptable evolves over time, resulting from new information (e.g., the impact of carbon dioxide emissions) or changing perceptions (e.g., what constitutes privacy). The only way for serious credit rating agencies is therefore to provide transparency into their assessment of ESG risks and benefits by developping an ESG classification nomenclature that includes

  • components (E, S and G) and, for each component,
  • categories and
  • subcategories of the ESG considerations that rating analysts view as most likely to have credit implications across sectors.

“For the E component, the categories are the same for public- and private sector issuers,” writes Moody’s in its updated cross-sector methodology, “and for S and G components, there are different categories for public and private sector issuers.” The materiality, time horizon and credit impact of ESG risks vary widely. Issuers’ fundamental credit strengths or vulnerabilities can mitigate or exacerbate ESG credit impacts. In some cases, ESG-related benefits can be a credit strength. ESG considerations may inform forward-looking metrics or scenario analyses, or they may be incorporated qualitatively.

Given this background, a credit rating agency should seek to incorporate all material credit considerations, including ESG issues, into ratings and to take the most forward-looking perspective that visibility into these risks and related mitigants permits. An ESG rating methodology should only discuss the general principles underpinning the analysis of current and developing ESG risks that can affect credit quality for issuers and transactions in all sectors, because only defaults can be statistically recorded and counted and can thus prove the objectivity of the standards. In this way, credit rating agencies secure the trust of investors who expect rating analysts to provide clear assessments of default probabilities. Moody’s “General Principles for Assessing Environmental, Social and Governance Risks” delivers an example of this approach to ESG considerations.

Genealogy of Country Risk

Definitions, Histories, Read

It is difficult to determine exactly when the concept of country risk was forged. The expression was used as far back as 1967 by Frederick Dahl – then assistant director of the Division of Examinations at the Board of Governors of the US Federal Reserve System – in a research paper addressing the international operations of American banks.

Frederick Dahl states that “an appraisal of the so-called country risk inherent in any foreign credit is the major distinction between domestic and international lending. Besides assessing the creditworthiness of the individual borrower, the bank has to exercise a judgment on political, economic, and social conditions in the country of the borrower as they are likely to affect foreign exchange availabilities at the time of repayment of the loan.”

It was not until 1975–1977 that the notion of country risk began to permeate the economic literature and media. Between 1970 and 1975, the external public debt of low- and middle-income countries soared by 144%, while the share of that debt financed by Western banks climbed from 7.5% to 25%.

This growing exposure to sovereign debt began to worry the US Office of the Comptroller of the Currency (OCC). By 1977, country risk had become a buzzword among bankers and investors. In its annual report released in June 1977, the Bank for International Settlements explained that “country risks [did] add new dimensions to private banking in many ways”; this international institution added that it was “necessary to appraise a country’s overall economic and political development and to relate the data on the amount and the structure of its external indebtedness to a number of macro-economic figures, such as current and prospective foreign exchange earnings.”

Starting in 1977, however, policy makers and academics offered different definitions of country risk. Confusion spread in the following years and remains to this day. The main reason is that country risk experts do not all monitor the same risks; instead, they focus on those risks that impinge on their own respective institutions or clients.

Read more and find all quoted sources in Country Risk: The Bane of Foreign Investors (by Norbert Gaillard, Springer, July 2020).

Issuer Definition

Definitions, Read

An issuer is a legal entity that issues financial instruments. Depending on the jurisdiction the issuer is domiciled in, the work of an issuer includes to develop, register and sell securities for the purpose of financing its operations. The most common types of securities issued are equities (common and preferred stocks) and debt (bonds, notes, debentures and bills).

The word issuer is so common in finance that it is easy to overlook the exact meaning of the word. The word meaning differs depending on the context. Different laws do not agree in their definitions. This applies not only between the jurisdictions of different states, but even within one jurisdiction.

Various rating agencies offer issuer ratings. Because of the various meanings of the word “issuer” these ratings have to be asked who exactly is meant. On the other hand, it must also be taken into account which exact characteristics of the issuer are classified by the rating. A rating can classify creditworthiness, but also, for example, the issuer’s compliance with ethical, ecological and social criteria.

In the Listing Rules of the United Kingdom of Great Britain and Northern Ireland, for example, any company, legal person or undertaking, any class of whose securities has been admitted to listing or is the subject of an application for admission to listing. In the Disclosure Guidance and Transparency Rules an issuer is a legal entity governed by private or public law which issues or proposes to issue financial instruments; a person whose securities are admitted to trading on a regulated market; and either a person whose shares are admitted to trading on a regulated market or a public company and any other body corporate incorporated in and having a principal place of business in the UK, whose shares are admitted to trading on a prescribed market (not being a regulated market). In the Prospectus Regulation Rules an issuer is a legal person who issues or proposes to issue the transferable securities in question. The examples show that the term “issuer” has different meanings depending on the context in which it is used.

In the United States of America, the term “issuer” means every person who issues or proposes to issue any security; except that with respect to certificates of deposit, voting-trust certificates, or collateral-trust certificates, or with respect to certificates of interest or shares in an unincorporated investment trust not having a board of directors (or persons performing similar functions) or of the fixed, restricted management, or unit type, the term “issuer” means the person or persons performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which such securities are issued; except that in the case of an unincorporated association which provides by its articles for limited liability of any or all of its members, or in the case of a trust, committee, or other legal entity, the trustees or members thereof shall not be individually liable as issuers of any security issued by the association, trust, committee, or other legal entity; except that with respect to equipment-trust certificates or like securities, the term “issuer” means the person by whom the equipment or property is or is to be used; and except that with respect to fractional undivided interests in oil, gas, or other mineral rights, the term “issuer” means the owner of any such right or of any interest in such right (whether whole or fractional) who creates fractional interests therein for the purpose of public offering.

In conclusion, issuers may be governments, corporations, investment trusts or other legal entities. In general, issuers are legally responsible for the obligations of the issue and for reporting financial conditions, material developments and any other operational activities as required by the regulations of their jurisdictions.

Patent Rating

Definitions, Methodologies, Read, Systems

Innovation rating and patent rating have different tasks, but are interrelated. An innovation rating is used to assess a company’s ability to compete with other (innovative) companies through innovation. The patent rating, on the other hand, is a future-oriented judgment on the relative intrinsic value of a patent and requires a system of classification. The classification system is used to organize patent documents and many other technical documents in relatively small collections based on common topics.

When should a patent rating be issued, when should this assessment be reviewed and possibly updated? In large organizations, this is already an organizational issue if this task is performed by a formal patent committee. The patent committee reviews the decision to file a patent application.

In practice, patent management ranges from the invention, to the processing phase in a patent committee or committee, if set up, in which inventions are reviewed and decisions are made as to whether a patent application should be filed or not, to the patent application process from the first filing to the granting of the (foreign) registration, patent maintenance and patent portfolio management. Patent ratings are particularly an instrument of patent portfolio management because it helps to analyze the structure of the portfolio.

Different technology areas can have different priorities depending on the technology and business strategy of the company. The maturity of the invention may result in some delay in the process. Certain cases may offer options for additional divisional applications.

Transparency is crucial for the qualification of the rating inputs. If a rating is repeated within a very short time, it should reliably deliver a comparable and verifiable result. As with any other rating system, validity and reliability must be checked.

A rating agency is committed to a code of conduct. The person submitting the rating should conduct the rating free of any biased assessment. Possible conflicts of interest must be disclosed. Any changes to the assessment of a particular case should be recorded, indicating the new assessment, who made the change, and the reasons for making the change, along with supporting material.

The fact that technology, companies and industries change over time is an important argument to justify why assessments should be reviewed at key points in the patent process and updated as necessary.

In addition to the perception on the market, patenting should be dealt with at all other milestones in the patent process and should be dealt with as needed, e.g. For example, if the patent examiner requests “official actions”, if the case takes place in another country and the patent application becomes due.

The importance of intangible assets is increasing. The concept of ratings, as it has been known since the 19th century for assessing the reputation of corporate partners and the quality of securities, can also be used in the world of intellectual property. If an asset cannot have any value, it is not an asset. Even air is an asset, because air can also become an asset paid for when it becomes scarce.

The nature of innovation means that inventions can vary from incremental to radical, can refer to products, services, processes or business models. The innovation process includes ambiguity, controversy and non-linearity, and this is also reflected in the inventiveness. The importance of each invention is a crucial question that needs to be answered.

The diversity of such intellectual property, both in terms of its maturity, geographic coverage and applicable technology, means that a rating scheme should bring benefits. The variety of patent applications ranges from semiconductor and computer technology, electrical machines, telecommunications, life sciences including the analysis of biological materials and biotechnology, optics, medical technology and pharmaceuticals to environmental-related technologies.

Patents give their holder freedom of action and protect product differentiation. Used in an entrepreneurial way, patents allow to generate income and grant business influence. Patents often enable technology to be put into practical use, bring cost competitiveness and support technology out-licensing. Patents help to organize the division of labor in the economy.

At this point it is not to be discussed whether the legal figure of the patent brings any economic benefit at all. There are strong arguments that costs and benefits are cancelling out. This is especially true if one takes into account not only the officials involved, but also the considerable resources that have to be kept in the company for this.

Patenting can be expensive, so costs need to be carefully considered. Patents need to be managed well. In companies that have thousands of patents, rating systems are imperative to keep track of these company assets. Cost management includes planning, coordination, control and reporting of all cost-related aspects. Identifying all costs and making informed decisions about options is not an easy task, especially in large companies. When purchasing patents, it is important to check which ones offer the best value for money. Systematization can also be carried out using a rating system.

The simplest rating system for any company is a black and white system. For example, a very simple two-step scheme is to label cases as either strategic or tactical, or even “in use” or “not in use”. If, in addition to “black” and “white”, the “grayscale” is also taken into account, one can speak of a rating system.

A number of questions arise for companies with patents or patentable inventions. Should the invention be implemented in “our” products or services? Is the invention likely to be implemented by a third party? Does the case offer licensing options? Does the invention relate to a unique selling proposition or a central function of the company? What is the possible use of the invention in the future, especially when it is linked to basic research?

In many companies, the establishment of a professional rating system for patents overwhelms the resources available. The rating of patents is therefore assigned to specialized rating agencies. The choice of rating approach should be formally documented and made available to the key players in the process of inventing and patenting. Each rating scheme that is designed and implemented must be consistently maintained over a certain period of time in order to ensure comparability.

As with any other rating system, the patent rating must also consider the conditions under which a methodology is changed and the standards of the assessment adjusted. A few decades ago, recording the data alone was a tremendous challenge. However, the assessment of cases is recorded today in the IP data management system. The associated data fields of the rating have to be treated with the same professionalism as all other key data fields that support the most important patenting processes. The rapid development of information and communication technology gives users of rating systems decisive competitive advantages.

Equity Rating Repair

Criteria, Definitions, Methodologies, Models, Performance, Read, Regulations, Repairs, Scales, Symbols, Systems

Stock instruments issued or to be issued and / or traded on certain stock markets may be the subject of ratings. Stock ratings reflect the risks associated with the creditworthiness of the issuer and the stock market liquidity of an instrument. However, they do not address the risk of loss associated with price changes and other market conditions, nor do they consider the reasonableness of prices for their market value. Ratings assigned at national level cannot be compared across borders and are assigned using national rating scales.

Such equity ratings are usually the result of regulatory intervention by the state to prevent investors and issuers from being harmed by malpractice on the stock exchanges. The requirement to issue equity ratings is therefore to be understood in some states as a reaction to regulatory requirements. To the extent that such requirements do not currently exist or are not applicable, share ratings are based on market practice.

Financial instruments affected by equity ratings include, but are not limited to, common shares issued by financial and non-financial companies. The equity rating method does not apply to shares issued outside of a public offer by private funds or other investment instruments, or to preference shares, as these are accessible through their own methodologies.

Stock ratings are about the elements to be valued as part of the stock rating process. Stock ratings are supplemented by analytical considerations regarding the issuer’s credit rating. The equity rating methodology should therefore not be viewed in isolation, but should be read in the context of the global criteria reports of ratings for financial and non-financial companies.

Share ratings are also referred to as buy, sell or hold recommendations. A strong buy recommendation can be expressed, for example, by a double plus ++ and a simple buy recommendation by a simple plus +, vice versa in sales recommendations minus – and double minus –. If the rater gives neither a recommendation to buy nor to sell, the recommendation “hold” e.g. can be expressed by a circle symbol o.

Analyst opinions expressed as buy and sell recommendations are as fast-paced as the stock market itself, as the Corona crisis recently showed: If the price of a share falls, the sell recommendation can quickly turn into a buy recommendation.

Because buy and sell recommendations depend on daily market price fluctuations, equity rating repair does not refer to the question of whether a stock is over- or undervalued.

Rating repairs therefore relate to the awarding of share ratings, which give investors an independent opinion on the creditworthiness of the issuer and the liquidity risk associated with their shares. The purpose of such stock ratings is to provide an estimate of the liquidity risk an investor takes when purchasing a particular stock security in order to measure, in a timely manner, how easy or difficult it will be to sell those instruments if the investor so decides.

The analysis includes evaluating the stock’s historical stock market behavior in relation to presence and traded volumes, as well as the relationship between the movements of the stock and the financial situation of the company and the industry in which it operates.

Creditworthiness and market liquidity risk are the most important factors in the equity rating for which evidence can be produced. At national level, equity ratings are therefore based on two types of analysis: issuer creditworthiness and market liquidity risk. The combination of these two factors leads to the determination of a company’s equity rating.

The purpose of a stock rating is not to assess the risk of default on such stocks. Shares are equity securities and they represent ownership, not just a claim. Therefore, they cannot be in default. Because stocks do not have specific payment obligations, the stock rating is about the likelihood that the issuer will continue to operate. Conceptually, equity ratings indicate that the more creditworthy an issuer is, the greater the likelihood that its shares will continue to be traded throughout the business cycle. In the current case of the bankruptcy of Wirecard, a company listed in the German stock index DAX, it would have been the task of a stock rating to signal the probability of such an event by a low rating.

Stock ratings reflect risks related to the creditworthiness of the issuer and the market liquidity of the stock. For the reasons outlined, however, they do not deal with the risk of losses associated with changes in share prices and other market conditions, nor with the adequacy of the market price of a particular security. Equity ratings are therefore not suitable as trading signals, for example to buy and sell a stock within a few hours. Equity ratings are also not the basis for trading Contracts for Difference (CFDs). Under no circumstances does such analysis result in a recommendation to buy or sell a particular security. Share ratings are therefore not a special form of share price estimates, nor are share prices used to determine forecasts of liquidity risk.

The information required to carry out the risk analysis and assign ratings is obtained from various sources such as the issuer, industry data and other relevant sources. For the specific analysis of the liquidity of the share, the statistical data are obtained from market sources that are required to be able to calculate the relevant stock market indicators.

The analysis usually includes five years of company history and financial data. The information required to assess the creditworthiness of the issuer can be requested directly from the issuer or obtained indirectly through agencies. Once the necessary information has been collected and checked, an analysis can be carried out using a uniform method.

Forensic Rating

If criminal energy is involved – as allegedly in the case of the Wirecard company – the stock rating cannot easily detect the counterfeit. Rating agencies emphasize that the information received from the issuer or its representatives will not be reviewed or verified (again). While ratings look to the future, auditors’ attestations are there to confirm that the company’s report agrees with the facts it finds.

In order to counter fraud cases like WorldCom, Enron and now apparently also at Wirecard and to give warning signals to investors, a forensic rating is required. Forensic ratings typically deal with individual offenses, unlike criminology, which examines the basics of criminal behavior. The concept of “forensic science” – like the concept of “credit rating” – often does not meet the criteria for scientific research in the narrower sense. It is understandable that forensic ratings are predominantly carried out using methods that are well established, standardized and as undisputed as possible. Innovation and creativity must be severely restricted for reasons of comparability and fairness. The scientific principles of objectivity, reliability and validity also apply to criminal investigations. It is very important to ensure the highest possible quality standard as with every rating.


Rating also does not replace the work of the auditor, because the auditor’s report is the overall opinion of an auditor after the audit of the annual financial statements. In it, the auditor assesses the conformity of the annual financial statements and the management report with the accounting regulations applicable to the company. An assessment is only made as to whether the situation of the company has been correctly represented, but no prognosis of the company’s creditworthiness and the liquidity of the share is given. A holistic assessment of the economic situation, which also requires a considerable degree of industry knowledge, is generally not carried out. The auditor’s report may only be issued after the material examination has been completed.

For securities without historical stock market information such as a first stock offer or with insufficient information, the analysis can practically only be based on the creditworthiness of the issuer. After approximately one year of trading and records of stock exchange transactions, equity liquidity is included in the analysis.

The issuer’s creditworthiness is expressed in its issuer default rating or its long-term national scale rating. Depending on the type of company, these are calculated according to the respective methods for non-financial – e.g. Chemical companies, technology companies) and financial companies (e.g. banks and insurance companies).

As with credit ratings, the purpose of credit analysis is to classify the likelihood that a company will meet its financial obligations (or in other words, the risk of default). The company’s operational and financial profile, its overall creditworthiness and thus the long-term rating of the issuer are good approximations of the risk of a company’s future cash generation capacity.

The equity rating includes qualitative and quantitative variables to measure the operational and financial risks of an issuer and to determine its credit profile in accordance with the concepts contained in the global rating methods for financial and non-financial companies.

As already indicated, an ex-post analysis is carried out to assess exchange liquidity, which is naturally dynamic and is based on the monitoring of certain relevant market indicators for measuring the liquidity of a share.

The world’s stock exchanges are very different. What is relevant for investors is the quality of the paper on the stock exchange where it can trade. Therefore, stock ratings are placed in the context of the country’s stock exchange. The analysis may include elements that reduce liquidity, e.g. for example, the series of a particular share that grants greater rights to another series of that security. The relative importance of the individual risk factors can vary. As a rule, indicators that indicate the low liquidity of a particular stock limit their rating to the lowest range on the scale.

The trading history of the share, the percentage of free float and the development of market capitalization and daily trading volume are factors that influence the assessment of the liquidity level of the share. The liquidity of a security is measured by the recent development of these and other stock market indicators, but essentially by the presence of the security on the market. Although the rating depends on the recent performance of the equity liquidity indicators, the track record of the indicators being assessed is critical to determining a rating.

  • The market presence is the main measure that is taken into account when determining market liquidity. The number of days on which an instrument has been processed in relevant amounts within the last 180 working days plays a role here. This indicator provides a measure of the number of days on which transactions relevant to a share were registered.
  • The number of days on which an investor would have been able to get out is important for assessing the liquidity of a share. Companies in which transactions are recorded almost every day have a high stock exchange presence, which speaks for a high level of liquidity.
  • Market capitalization – and thus indirectly the share price – also plays a role in the share rating, because it reflects the market value of a stock corporation at a certain point in time. The market capitalization is calculated by multiplying the share price by the number of shares. By looking at the market capitalization, there is a ranking that the companies rank according to their market size. Rapid, frequent and unilateral changes in market capitalization reflect the trend and volatility of market value over a period of time.
  • The free float relates to shares that are not held by majority or long-term shareholders. Free float in stock corporations means the total number of shares available for exchange trading. The higher this percentage, the more liquid the share should be. When the trading volume is recorded, the total value of the transactions in a share is taken into account.
  • The average daily trading volume is determined by the presence on the stock markets and the market capitalization and reflects the monetary value of the average daily transaction volume for a specific security in a specific period. The trading volume is calculated by the number of securities traded in a period multiplied by the price of each transaction. The total volume traded by an issuer is compared to the total volume traded by the entire market.

Share ratings express the “option character” of a company’s shares. According to the option price theory, the shareholder can also be modeled as a buyer of a purchase option. By paying a premium – the share price – the buyer receives the right, but not the obligation, to continue operating the company. If the value of all the assets of a company falls below the value of the creditors’ claims against the company, the shareholder does not have to replenish equity, but can leave the company to the creditors for liquidation as part of an insolvency procedure.

Since the company’s credit rating also includes the risk of default, it characterizes the option character of the share. The lower the share rating, the greater the option character of the share.


Rating Assets

Definitions, Methodologies, Read

Is a musical work a rateable asset? Or is just a metal like gold a rateable asset? RATING EVIDENCE and RATING©REPAIR relate to the evidence and to the repair of ratings for specific assets or counterparties. In the following the focus will be on the definition of assets. Since the word “asset” plays an important role in the differentiation of rating types such as “credit rating”, “fund rating”, “real estate rating”, “start-up rating”, “commodity rating”, here are some ideas on how to identify things which are accessible to a rating methodology. Since the first bond ratings were devised as forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates more than a century ago, rating systems have evolved in response to the increasing depth and breadth of the global capital markets. Much of the innovation in rating systems has been in response to market needs for increased clarity around the components of investment risk, for inclusion of new assets classes or for finer distinctions in rating classifications.

An “asset” is in its broadest sense a useful or valuable thing or person. More specifically an asset is an item of property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

While a “tangible asset” is an asset that has a physical presence, is touchable and measurable in meters, square meters, kilograms, e.g. property, equipment, “intangible” is an asset that has no physical presence, such as patents, copyrights, goodwill and trademarks. Intangible assets are no less “real” than tangible assets, but the latter are also called “real assets”.

In financial accounting, an asset is any resource owned by a business or an economic entity. The monetary value of anything that can be owned or controlled to produce positive economic value can be recorded in a balance sheet. Long-lived assets such as buildings, equipment and furniture that cannot be easily converted into cash are called “fixed assets”, while cash and assets that are expected to be consumed or expended or converted into cash within the current operating period are called “current assets”. To develop a single set of high-quality, understandable, enforceable and globally accepted accounting standards, an asset has been defined as a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Since so called “wasting assets” irreversibly decline in value over time, this may be accounted for by applying depreciation under accounting regimes. Vehicles and machinery, mines and quarries in use are tangible wasting assets, while expiring options and insurance policies are intangible wasting assets.

An asset that has a value based on a contract such as deposits, stocks, bonds and derivatives is called a “financial asset“. Financial assets are opposed to non-financial assets. These are property rights which include both tangible property such as land, real estate or commodities and intangible assets such as intellectual property. Whether a financial asset is “held for trading” (acquired or incurred principally for the purpose of selling, or is part of a portfolio with evidence of short-term profit-taking) or “held-to-maturity” (the owner is willing and able to hold it till maturity) are subject-related aspects and are not included in an object-related rating approach. Profiling mirrors subject-related issues, while rating mirrors object-related issues.

The law selectively “codes” certain assets, endowing them with the capacity to protect and produce wealth. With the right legal coding, almost any object, claim, or idea can be turned into an asset. To pick and choose among different legal systems and legal devices is a key competence for creating an asset, which is in turn accessible to an evidence-based rating methodology. Since codability is given for almost anything, ratings can help under many more circumstances than just decisions about bond investments.

An evidence-based rating method for assessing an asset can be developed mainly under the following conditions:

  • The investor can choose from various alternatives in the relevant asset class. He can acquire one or the other asset within the asset class. It is not critical whether the asset can be sold again: a pension or life insurance policy, for example, can be inalienably linked to a specific person. At the time of purchase, however, there might be various alternatives to consider. If there is no choice, for example in the case of a coercive system of compulsory levies, no ratings are required to decide, since there is nothing left but to follow the applicable rule. The freedom to choose is an inalienable prerequisite for any meaningful rating.
  • The economic benefit of the asset can be measured by a counting unit – numéraire – such as euros, dollars or grams of gold. The numéraire is a basic standard by which value is computed. While usually the legal tender, the numéraire can be any tradable economic entity in terms of whose price the relative prices of all other tradables can be expressed. There are considerable problems with the choice of this computing unit, especially when viewed over the long term. Currencies can be reformed and gold can be banned.
  • There has to be a legal framework for an asset, a set of promulgated rules or procedural steps, in common law established through precedent or in a code jurisdiction made explicit in statutory or regulatory law through which judgments can be determined in a legal case. An asset-relevant doctrine comes about when a judge makes a ruling where a process is outlined and applied, and allows for it to be equally applied to like cases. When a credit risk is rated, the risk that an entity may not meet its contractual financial obligations as they come due and any estimated financial loss in the event of default or impairment is evaluated. The contractual financial obligations addressed by a credit rating are those that call for, without regard to enforceability, the payment of an ascertainable amount, which may vary based upon standard sources of variation (e.g., floating interest rates), by an ascertainable date.
  • It is not enough to know about rules. It is equally important to form an opinion on how likely it is that there is a willingness to play by the rules. A credit rating addresses not only the issuer’s ability to obtain cash sufficient to service the obligation, but also its willingness to pay.

An “asset” is a resource with economic value that an individual, organization, or country owns or controls with the expectation that it will provide a future benefit. A “rating” classifies the probability that expectations will be met. Consequently, “rating evidence” is about the evidence, reliability and validity of the classification of this probability. In addition to assets, contractual partners can also be the subject of a rating. If counterparties are rated, a rating classifies the probability that they will meet the expectations placed on them.

While rating assets involves a specific interest of a decision maker to choose among investments and to allocate ressources, a social credit rating calls for the establishment of a unified record system for individuals, businesses and the government to be tracked and evaluated for trustworthiness.

Solvency Index

Bureaus, Definitions, Read

A solvency index is the central pillar of a commercial report and other information formats for evaluating a business’s solvency. Its accurate forecasts of the probability of default (PD) provide for quick and direct assessment of a customer’s solvency – and consequently also the customer’s credit worthiness.

The solvency index calculation techniques vary and are continually evolving, employing proven mathematical and statistical analysis methods. These advances not only take structural changes in the economic structure, but also factors such as changing PDs in the individual market segments, into account.

The solvency index’s forecasting accuracy is also attributed to an extensive database. At a leading German credit bureau, it has increased significantly over the past few years – not only in terms of 10 million accounts now published, but also regarding industry key performance indicators and in the payment-experience field. The debtors’ register of this credit bureau alone, for example, gives access to over 100 million payment experiences in Germany.

Driving Fitness Rating System

Definitions, Read, Scales, Scores, Symbols, Systems

On May 1, 2014, the German Central Register of Traffic (VZR) became the Driving Fitness Register (FAER). The existing scoring system was converted to the new driving fitness rating system.The basis for this is the fifth law amending the Road Traffic Act and other laws of August 28, 2013 and the Ninth Ordinance amending the Driving Licenses Ordinance (FeV) and other road traffic regulations from November 5, 2013.

A prerequisite for a scoring in the driving fitness rating system is on the one hand a listing of the infringement in Appendix 13 to § 40 FeV and in the case of misdemeanors on the other hand, the fine imposed at least 60 euros.

Unlike in the VZR, the FAER only records the decisions on misdemeanors which have an impact on the safety of road traffic. Administrative offenses such as the prohibited entry into an environmental zone are no longer stored in the FAER. Therefore, the decisions that were stored in the VZR until the end of the April 30, 2014 and that can not be saved according to the new rules for the FAER, were deleted on May 1, 2014.

Only the fact that the infringement is listed in Annex 13 to Section 40 FeV is decisive for the storage. In this context, however, it is not necessary for the fine to be at least EUR 60, since the registration limit at the time of the commission of the administrative offense (before May 1, 2014) was 40. euro.

However, fines that are no longer to be stored in the FAER are appropriately increased.The entries stored in the FAER are provided to the driving license authorities for the purpose of checking the fitness to drive.

In place of the previous points system with an assessment of offenses of 1 to 7 points, the driving fitness rating system was established with new ratings. According to this, the registered offenses or misdemeanors are divided into the following categories depending on their importance for traffic safety (§ 4 (2) Road Traffic Act (StVG)):

  • 3 points: Offenses related to traffic safety or equivalent offenses if the driving license has been withdrawn or if a lock-up period has been granted for the issue of a driving license
  • 2 points: Offenses related to traffic safety or equivalent offenses without removal of the driving license or without a waiting period for the issue of a driving license; particularly traffic safety impairing or equivalent offenses
  • 1 point: Traffic offenses or equivalent offenses

Meaning of Rating Evidence

Definitions, Performance, Read

Deciding on investment and financing means choosing between alternatives. Every investment and financing decision is a choice between alternatives. There are worse alternatives, better ones or equally good or equally bad ones. The classification of the decision options we call rating.

One focus of our work is on credit ratings. The credit rating we record is an opinion on the economic ability, legal obligation and willingness of an economic entity to meet its payment obligations in full and on time in the long term. The judgment is expressed in terms of scales and symbols commonly used internationally and in the financial systems of more than 110 countries in the world.

RATING EVIDENCE does not award ratings according to idiosyncratic criteria and is not a rating agency, but instead started in 2004 to research evidence-based ratings. In particular, this includes information from the following sources: rating agencies, banks, credit insurers, credit bureaus, research firms, analysts as well as the rated organization itself.

As market economies face a greater or lesser risk of default, all market participants have a priori probabilities of default and bankruptcy. These a-priori probabilities can be corrected upwards or downwards by taking data from the above-mentioned sources and mapped onto generally accepted rating scales. Depending on the evidential value of the data collected, the rating thus determined results in varying levels of evidence, which are expressed by RATING EVIDENCE on the basis of a percentage (0% for no to 100% for complete evidence).

Evidence of Ratings

Definitions, Read, Scales

Similar to the visual acuity of the eye, rating systems also recognize patterns and contours with different accuracy.

You may have already experienced it with your ophthalmologist: An “8” is considered a “B”, a “c” is confused with an “e”, and so on. The resolution of the eyes is different. The same is true of rating models and methods of classifying the creditworthiness of economic units. Each rating also has the dimension of different evidence.

Maybe your rating was just turned on the wheel of fortune? It may happen to some debtors or disappointed investors. If there is no correlation at all between the rating given and the actual probability of default, the evidence of the rating would be zero, 0%. Only theoretically can the evidence reach 100% absolute judgmental certainty. An unplayed dice or a state-controlled, notarized lottery game gives examples of probability judgments that can be given with almost absolute certainty.

Another example: Your good gut feeling may allow you to assess tomorrow’s weather conditions. The evidence is low, but maybe you’re lucky and in line with your prognosis. However, the German Weather Service works according to the DWD law with more extensive resources and far-reaching responsibility for the meteorological security of maritime and aviation and official warning. Scientifically, these forecasts are based on higher evidence. What applies to the weather forecast applies in this sense for any kind of rating result. If you do not even use the thermometer and the barometer for the prediction, you often miss the prognosis.

Another example: An unzinked die rolls a one with a one-sixth chance. Thus, a rating system that assigns to this event exactly this probability of 16.6 …% and not erroneously a higher (e.g., 20%) or lower (e.g., 10%) probability is better justified by empirical facts.

In the case of credit rating, the more highly accurate information on default risk estimates can be made available, the more likely it is to provide a high quality, accurate rating. Numerous sources of information help to find a high-evidence rating. The rated company itself can play a key role in determining an accurate rating by providing you with well-known credit rating information and by explaining the extent of its involvement in the judgment of these institutions.

Understand the meaning of “rating evidence”.