Sovereign and Banks’ Rating Models

Abstract

In general, there are three main methodologies, summarized in Table 3.1, which can be used to develop a PD model:

• ■ good/bad analysis — illustrated in Chapter 2 and applied most notably to corporate SME and retail counterparts;

• ■ the pure expert ranking method — used, typically, for the development of large corporate models; and

• ■ the shadow rating approach — specific to the segments characterized by a limited number of defaults, such as the large corporate portfolio, but with the difference being that they are constituted by counterparts largely provided by an official rating assigned by an external agency (such as Standard & Poor’s, Moody’s, Fitch and so on).