Calibration of a credit rating scale for Polish companies

An increasing number of bankruptcy announcements causes that even greater attention is put to the correct evaluation of probability of default (PD) and decisions made on the basis of it. Reliable estimation of bankruptcy threat reduces the risk not only for the company itself but also for all the co-operating companies and financial institutions. The financial crisis tightened up the conditions of gaining financing from the banks. However, it is not only the evaluation of PD itself that is so important but also the correct classification of companies due to their PD level (“good†or “bad†companies). There is very little consideration about the possible adjustments of credit risk scale as usually the American scale is adopted with no changes which seems incorrect. This paper stresses the importance of the correct calibration of credit rating scale. It cannot be assumed (as it was in the past) that once stated scale is invariable and independent of the country. Therefore the research carried on the basis of Polish companies shows that the credit rating scale should be changed and the default point (otherwise “cut-off†point) should be higher than in the past. The author will use a modified classification matrix based on the probability of default. The paper compares the classification results of Polish quoted companies due to the level of their credit risk level (PD) and the fact of actual default when using various default “cut-off†points and scales.