Corporate Credit Risk Modeling: Quantitative rating system and probability of default estimation

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Corporate Credit Risk Modeling: Quantitative rating system and probability of default estimation

by João Eduardo Fernandes of Banco BPI

October 2005

Abstract: Research on corporate credit risk modeling for privately-held firms is limited, although these firms represent a large fraction of the corporate sector worldwide. Research in this area has been limited because of the lack of public data. This study is an empirical application of credit scoring and rating techniques to a unique dataset on private firms bank loans of a Portuguese bank. Several alternative scoring methodologies are presented, validated and compared. Furthermore, two distinct strategies for grouping the individual scores into rating classes are developed. Finally, the regulatory capital requirements under the New Basel Capital Accord are calculated for a simulated portfolio, and compared to the capital requirements under the current regulation.

JEL Classification: C13, C14, G21, G28.

Keywords: Credit Scoring, Rating, Private Firm, Basel Capital Accord, Capital Requirements.

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