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PD Model Fundamentals On Banks: A Pioneer Model For Assessing Bank Creditworthiness

During the recent global economic downturn, the number of banks that defaulted rose to unprecedented levels. However, the high default rate for banks was not captured by most existing models developed in the marketplace, be it by model vendors or internally by financial institutions, corporations, or investors. This is partly because many existing models are based on the historical financial data collected by banks, and don’t take into account early warning signals or systemic risk factors such as the deterioration in the environment of a country’s banking industry and economy.

S&P Global Market Intelligence’s PD Model Fundamentals – Banks measures the creditworthiness of a bank in terms of its probability of default (PD) over a one-year time horizon. Our model is based on a new approach that combines advanced modeling techniques with a comprehensive and up-to-date data set that goes far beyond standard financial ratios.

Our model is based on a new approach that combines advanced modeling techniques with a comprehensive and up-to-date data set that goes far beyond standard financial ratios.

Scope of Application

The model applies to “Banks” or “Thrifts & Mortgage Finance”, (see Appendix A) as defined via the Primary Industry Classification Standard (PICS) maintained in S&P Global Market Intelligence’s S&P Capital IQ Platform.

  • Financial and Macroeconomic Factors

Our model utilizes both financial data from banks and the most relevant macroeconomic data for the banking sector to generate what we regard as a reliable estimation of probability of default. Hence, it captures both market risk and industry-specific risk. 

  • Global Coverage

As the world has become more interconnected economically, financial institutions, investors, and multi-national corporations have shown more and more interest in the creditworthiness of banks around the globe. Our model covers country and sovereign risk for 247 countries to reflect their different operating environments and degrees of economic development. For country coverage, please refer to Appendix B.

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  • Public and Private

Our model covers both private and public banks. Public banks are those listed on a stock exchange.

  • Model Output

The model’s primary output is a one-year probability of default, which we then map to a credit score. The scores are represented via lower-case letters.1

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 1S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.