The aim of validating default probabilities is to analyze whether these are not too low. For small sample sizes, however, there are not enough observations available to detect excessively low default probabilities.We therefore propose a modification of default probability validation which...

Credit ratings are expert systems which assess the likelihood of a borrower to default. The Basel Accord allows banks to base regulatory capital requirements on the default probability of a rating. Banks must prove that the employed default probabilities are valid estimates. Since in credit risk...