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Finance and Credit
 

Benchmark test for calculated default probability values derived from the application of rating-based models

Vol. 27, Iss. 12, DECEMBER 2021

Received: 11 October 2021

Received in revised form: 25 October 2021

Accepted: 8 November 2021

Available online: 27 December 2021

Subject Heading: Financial control

JEL Classification: C58, G17, G28

Pages: 2719–2745

https://doi.org/10.24891/fc.27.12.2719

Mikhail V. POMAZANOV National Research University – Higher School of Economics (NRU – HSE), Moscow, Russian Federation
m.pomazanov@hse.ru

https://orcid.org/0000-0003-3069-1511

Subject. This article deals with the issues of validation of the consistency of rating-based model forecasts.
Objectives. The article aims to provide developers and validators of rating-based models with a practical fundamental test for benchmarking study of the estimated default probability values obtained as a result of the application of models used in the rating system.
Methods. For the study, I used the classical interval approach to testing of statistical hypotheses focused on the subject area of calibration of rating systems.
Results. In addition to the generally accepted tests for the correspondence of the predicted probabilities of default of credit risk objects to the historically realized values, the article proposes a new statistical test that corrects the shortcomings of the generally accepted ones, focused on "diagnosing" the consistency of the implemented discrimination of objects by the rating model. Examples of recognizing the reasons for a negative test result and negative consequences for lending are given while maintaining the current settings of the rating model. In addition to the bias in the assessment of the total frequency of defaults in the loan portfolio, the proposed method makes it possible to objectively reveal the inadequacy of discrimination against borrowers with a calibrated rating model, diagnose the “disease” of the rating model.
Conclusions and Relevance. The new practical benchmark test allows to reject the hypothesis about the consistency of assessing the probability of default by the rating model at a given level of confidence and available historical data. The test has the advantage of practical interpretability based on its results, it is possible to draw a conclusion about the direction of the model correction. The offered test can be used in the process of internal validation by the bank of its own rating models, which is required by the Bank of Russia for approaches based on internal ratings.

Keywords: credit risk, probability of default, statistical test, Gini, ROC curve

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