What Is a Probability of Default?

Customer risk early warning system In the credit risk management of commercial banks, the probability of default refers to the possibility that the borrower will not be able to repay the principal and interest of the bank loan or perform related obligations within a certain period of time in the future. Probability of default is the basis for calculating expected loss of loans, loan pricing, and credit portfolio management. Therefore, how to calculate the probability of default accurately and effectively is very important for the credit risk management of commercial banks.

Probability of default

client
Probability of default (PD)
The probability of default refers to the possibility that the borrower will default in a certain period in the future.
For the Chinese banking industry, the internal rating is only in its infancy, with a short and irregular time frame. The infrastructure construction of default databases and transfer matrices is almost blank. Credit ratings of loan companies are more used for customer selection and The early warning of risks has not developed towards a deeper level of quantitative risk management. To this end, Chinese commercial banks and rating companies should actively create conditions to strengthen the measurement of customer default probability in order to effectively improve the level of credit risk management.
First, in conjunction with the Basel New Capital Accord reference definition
Scientifically define the concept of corporate default. At present, there is no consistent standard for corporate default in China. In order to be in line with international standards, it is recommended that the Chinese banking industry define the concept of corporate default as follows: Within a certain period (usually one year), as long as there is a Any suspicious or loss of loans is counted as a defaulting enterprise.
Second, to accelerate the establishment of infrastructure for measuring the probability of default
Default database. Through the establishment of corporate financial data filters, the Chinese banking industry can verify the authenticity of financial statements submitted by enterprises, establish a qualified database of defaults, and lay a solid foundation for measuring the probability of default. The "Bank Credit Registration and Consulting System" established by the People's Bank of China has provided a massive loan database information platform for the Chinese banking industry. Based on this, domestic banks can make full use of the data resource advantages of the system, and continuously improve the system information, and then build our own database of defaults.
Third, strengthen the research on the measurement model of probability of default
Based on the operating environment in which the Chinese banking industry is located and its historical practice is unique, those models of default probability that can be applied by western commercial banks may not be suitable for our commercial banks. However, we can learn from the measurement ideas, methods and processes of these PD models, and combine data accumulation to realize the transition from simple models to complex models. For example, you can use the credit measurement model to measure the transition probability and default probability of each credit rating in the existing year based on the accumulation of rating result data of existing years, and then form an internal credit rating transition matrix measurement. As the data increases, it is continuously adjusted. In this way, after a period of accumulation, we can build our own internal transfer matrix model. In addition, in combination with the actual credit situation of Chinese loan companies, the measurement of the default probability of each credit level in the transfer matrix model must consider the influence of factors such as industry factors and economic cyclical factors, as well as factors such as region, scale, and the nature of corporate ownership.

IN OTHER LANGUAGES

Was this article helpful? Thanks for the feedback Thanks for the feedback

How can we help? How can we help?