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Low Default Portfolios: A Proposal for Conservative Estimation of Default Probabilities
Company: Financial Services Authority
Company Url: Click here to open
Year Of Publication: 2006
Month Of Publication: April
Pages: 31
Download Count: 595
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Comment Num: 0
Language: EN
Who Can Read: Free
Date: 5-29-2006
Publisher: Administrator
Low default portfolios are those for which banks have little default history, so that average observed default rates might not be reliable estimators of default probabilities (PDs). A key concern for regulators is that credit risk might be underestimated as a result of data scarcity. This paper proposes a quantitative approach to produce conservative PD estimates. The estimate of portfolio wide PD is determined by the size of the portfolio, the number of observed defaults and the level of confidence that is placed on this empirical evidence. This central PD estimate is then used ot adjust the PDs that the bank's own credit experts will have allocated to individual grades within the portfolio.
Benjamin, Nathanael Sign in to follow this author
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