ESTIMATION OF THE PROBABILITY OF DEFAULT BASED ON RELEVANT ECONOMIC AND FINANCIAL INDICATORS

Abstract

The credit risk is one of the main banking activity risks, with direct impact on the bank performance. Approaches based on internal rating models introduced by the Basel II agreement allow banks to use their own estimates for credit risk quantification, with direct effect on capital adequacy. This study aims to develop a scoring model for quantifying the probability of default dependent on the non-performing loans rate evolution based on quantitative information and determination of the power of prediction to determine non-reimbursement situations. Also, it was considered the determination of some qualitative variables impacting on the reimbursement capacity of companies. The financing sources, in essence, in-house or attracted, condition the profitability of any business and influence the financial position of the company, both in the short and long term. This study aims at an understanding of the inter-conditioning relationship between the financing sources, profitability and default risk. The estimation of the default probability is the first step to determining and assessing the credit risk. Major issues in the estimation of the default probability are generated by the limitation of the required information. The approach based on internal rating models relies on the accuracy of the default probability estimation.

Keywords

• probability of default, financial performance, credit risk, qualitative variables, macroeconomic environment, credit scoring