Consistency of banks' internal probability of default estimates: Empirical evidence from the COVID-19 crisis
Abstrakt
The Basel III post-crisis reforms target the application of internal credit risk models for the estimation of the risk weighted assets of banks due to concerns about model risk. We use a unique dataset of 4.9 million probability of default (PD) estimates covering the January 2016 -June 2020 period sourced from 28 global banks to provide a deep insight into the comparability of model outputs.
Our contribution is four-fold. Firstly, we confirm that there is a substantial variance in credit risk estimates.
Secondly, we show that the level of PD variance is dependent on the entity type, industry, and location. Thirdly, we conclude that a considerable part of the variance is systematic, especially for credit risk estimates of funds.
Finally, we illustrate the massive impact of the COVID-19 pandemic on the PD variance. The results highlight areas with relatively larger comparability issues, and they can be used by regulators to design more targeted policies.