PD Benchmarking Report 2019


Daniela Thakkar (GCD)
PD modelling for regulatory capital

This report, which is designed to help banks benchmark their Probability of Default (PD) estimates against industry peers, highlights the conservative nature of banks’ internal PD estimates, with average PD estimates for the global corporate segment over the last 15 years standing at 1.63% compared to an average default rate of 0.90% over the same period. 

For the report, GCD collected information regarding long-term internal observed default rates and internal rating migration matrices from a portfolio of 26 leading financial institutions, over a period of 15 years. This data is highly valuable for benchmarking key risk processes within banks, such as PD rating scale calibration, PD model calibration, regulatory and economic capital calculation and stress testing, among others.

Banks are required to  compare their internal results to external benchmarks, such as those produced by credit rating agencies (CRAs). However, while CRA benchmarks are typically based on bonds, this study provides a bespoke alternative to CRA reports – comparing the same instruments to provide a more accurate representation. Due to the specific underlying instruments, wider coverage of counterparties and different sensitivities of rating systems to the macro-economic cycle, banks’ internal observed default rates and rating transition matrices behave very differently from those established by CRAs.

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