The misestimation of rating transition probabilities may lead banks to lend money incoherently with borrowers’ default trajectory, causing both a deterioration in asset quality and higher system distress. Applying a Mover-Stayer model to determine the migration risk of small and medium enterprises, we find that banks are over-estimating their credit risk resulting in excessive regulatory capital. This has important macroeconomic implications due to the fact that holding a large capital buffer is costly for banks and this in turn influences their ability to lend in the wider economy. This conclusion is particularly true during economic downturns with the consequence of exacerbating the cyclicality in risk capital that therefore acts to aggravate economic conditions further. We also explain part of the misevaluation of borrowers and the actual relevant weight of non-performing loans within banking portfolios: some of the prudential requirements, at least as regards EMS credit portfolios, cannot be considered effective as envisaged by the regulators who developed the “new” regulation in response to the most recent crisis. The Mover-Stayers approach helps to reduce calculation inaccuracy when analyzing the historical movements of borrowers’ ratings and consequently, improves the efficacy of the resource allocation process and banking industry stability.

Credit risk involves not only the complexity of screening but also monitoring and estimating rating transition. The adoption of inadequate transition matrices causes a misevaluation of credit risk, a consequent misallocation of capital, with the prospect that the lending process will be affected by increasing transaction costs and limited rationality, especially after a shock. Comparing the mover–stayer and the Markov chain approaches to estimate the SME rating transition matrix, we find that the risk of a structural credit shock imposes flexible estimates not constrained by the long-run trajectory of borrowers. Improved migration estimation mitigates adverse selection in banks’ lending behavior. This conclusion is particularly true during economic downturns with the consequence of reducing the cyclicality and empowering the resilience of banks.

The literature dedicated to the problems of transboundary pollution often aims to verify what the environmental and energy interactions between countries are. Little attention is paid to the financial relations of the phenomenon. We analyze how financial, environmental and energy flows have been redistributed within the main Mediterranean countries, with particular reference to pollution. Applying advanced methods of correlation, we verify the dynamics of transfer processes with the aim of assessing whether the link between economic and financial and environmental flows might support the hypothesis that rich countries export environmental emissions to poor ones. Our results show that richer countries have a significant propensity to export energy, financial flows and polluting emissions. The imbalance is even greater for emissions with local impact. This process is accompanied by a substantial increase in the financial activities of the North Mediterranean countries to the detriment of those of the South, which progressively increase their indebtedness. We find out that the economic and financial development of the North Med is accompanied by an increasing environmental impact measured by the various types of emissions covered by our study. The research shows how the most industrialized countries of the Mediterranean area are increasing the economic and financial gap with respect to the Southern Mediterranean countries.