Credit risk migration analysis of farm businesses

Abstract

The migration approach to credit risk measurement is based on historic rates of movements of individual loans among the classes of a lender’s risk‐rating or credit‐scoring system. This article applies the migration concept to farm‐level data from Illinois to estimate migration rates for a farmer’s credit score and other performance measures under different time‐averaging approaches. Empirical results suggest greater stability in rating migrations for longer time‐averaging periods (although less stable than bond migrations), and for the credit score criterion versus ROE and repayment capacity.