Validating the discriminatory power of a rating system is not trivial: the underlying default probabilities that determine the discriminatory power change over time due to changes in the macroeconomic environment and the credit portfolio. This paper presents a methodology using Basel II's...

This article proposes a sequential Bayesian updating approach to estimate default probabilities on rating grade level for no- and low-default portfolios. Bayesian sequential updating allows to obtain default probabilities also for those rating grades for which no defaults have been observed. The...

In credit portfolio modeling the asset correlation parameter is used to describe the degree of default rates fluctuations. In this article we estimate the asset correlation parameter for banks and other industry sectors from default data. We find that estimates of the asset correlation vary...

The paper proposes a sequential Bayesian updating approach to estimate default probabilities on rating grade level for no- and low-default portfolios.Bayesian sequential updating enables default probabilities to be obtained also for those rating grades for which no defaults have been...

Accounting standards require from financial institutions to consider and forecast multiple macroe- conomic scenarios when calculating loan loss provisions. Loan loss provisions protect a financial institutions against losses. But how to determine objectively the number of scenarios and to...