Moody's RiskCalc™ Model for Privately-Held US Banks

by Ahmet E. Kocagil of Moodys|KMV,
Alexander Reyngold of Moody's|KMV
Roger M. Stein of Moody's|KMV, and
Eduardo Ibarra of Moody's|KMV

July 2002

Overview: This report documents RiskCalc for U.S. Banks, Moody's model for estimating the probability of default (PD) for privately-held U.S. banks, thrifts, and bank holding companies. RiskCalc for U.S. Banks is a robust and validated model that produces one- and five-year PDs. It predicts separate PDs for bank holding companies and bank and thrift subsidiaries.

RiskCalc is a statistical model that estimates PD based on financial statement data. The model has been tested using rigorous out-of-sample [and out of time] techniques to prevent overfitting. The model is based on data from approximately 7,000 U.S. banks, thrifts, and bank holding companies including over 400 failures over the last two decades.

We believe RiskCalc for U.S. Banks is an important addition to the RiskCalc network of default prediction models, which now includes country-specific models for private companies in the U.S., Canada, Mexico, United Kingdom, Germany, France, Spain, Portugal, Netherlands, Belgium, Japan, and Australia. In addition, Moody's KMV provides global coverage of publicly traded industrial and financial firms. We feel that RiskCalc for U.S. Banks will be a meaningful addition to the practice of credit risk management and a step forward in answering the call for rigor that the BIS has outlined in their recently proposed Basel Capital Accord.

JEL Classification: C35, C52, G21, G33.

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