Understanding Credit Ratings
In markets for stocks, commodities, goods or services, price answers the question: “What’s it worth to the buyers?” In money and credit markets, the borrower “sells” its credit to a lender who “buys” a credit.
Everyone knows the value of money: money today is equal to its face value. The problem is future value: the value of money today plus a fair replacement cost. But what is that “replacement cost”? What is ”fair”?
In textbooks, a fair replacement cost is the yield a lender earns by investing with a risk-free borrower. But in life, delinquency and default risk are real, so it must include compensation for the risk of principal loss.
Explore Real Value
Understanding the value of money today versus its future value involves accounting for its face value and a fair replacement cost, which must include risk compensation due to delinquency and default risks.
In markets for stocks, commodities, goods or services, price answers the question: “What’s it worth to the buyers?” In money and credit markets, the borrower “sells” its credit to a lender who “buys” a credit.
Everyone knows the value of money: money today is equal to its face value. The problem is future value: the value of money today plus a fair replacement cost. But what is that “replacement cost”? What is ”fair”?
In textbooks, a fair replacement cost is the yield a lender earns by investing with a risk-free borrower. But in life, delinquency and default risk are real, so it must include compensation for the risk of principal loss.
Credit is the willingness and the ability to pay. The will to pay is typically excluded from credit rating technologies, so the emphasis is on ability. What remains is a self-fulfilling prophecy: my credit is good because my credit is good, or my credit is bad because my credit is bad.
Clean Fintech’s technology is an assessment of the willingness to pay based on a look-back analysis of the borrower’s repayment patterns and simulation of the changing picture of risk inside the credit structure with frequent updating.
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Modernizing the Credit Layer and Leading Sustainability
