Estimating the Probability of Default with Applications in Provisioning the Portfolio of Clients of a Credit Institution

摘要

In this paper we study the implications of estimating the expected probabilities of default (PDs), for the firms that are already part of a credit portfolio of a bank (or in general, of a credit institution), on the provisioning process of that portfolio. An applied example of an estimation of PDs is conducted on a representative sample of companies from a real portfolio of an important bank in Romania (among top five banks as size). With respect to what is recommended by the standard practice and central bank authorities, our provisioning application (based on the logistic estimation of PDs) results in a higher risk aversion for those credit classes of superior financial reliability, respectively leads to a risk underestimation for the companies in the credit classes with low levels of reliability. Besides, the results of our econometric exercise of estimating PDs reveal the importance of the solvency as predictor of the default probability, as well as the negative effect of the services sector, in the context of the financial and economic Romanian crisis of the year 2008.