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Determining the Probability of Default and Risk‐Rating Class for Loans in the Seventh Farm Credit District Portfolio
Author(s) -
Featherstone Allen M.,
Roessler Laura M.,
Barry Peter J.
Publication year - 2006
Publication title -
applied economic perspectives and policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.4
H-Index - 49
eISSN - 2040-5804
pISSN - 2040-5790
DOI - 10.1111/j.1467-9353.2006.00270.x
Subject(s) - portfolio , probability of default , class (philosophy) , business , credit risk , actuarial science , credit rating , default , default risk , economics , finance , computer science , artificial intelligence
Credit risk is the primary risk facing financial institutions. With the proposed guidelines under the New Basel Accord, financial institutions will benefit from better assessing their risks. The probability of default (PD) and risk‐rating class is studied for 157,853 loans in the Seventh Farm Credit District Portfolio. Repayment capacity, owner equity, and working capital origination loans are important determinants of the PD. Standard & Poor's (S&P) reported probabilities of default were used to classify each of the loans into a risk‐rating class. The average predicted PD is 1.61%, which would fall into the BB— S&P class.