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Determining the Probability of Default and Risk-Rating Class for Loans in the Seventh Farm Credit District Portfolio

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  • Allen M. Featherstone
  • Laura M. Roessler
  • Peter J. Barry

Abstract

Credit risk is the primary risk facing financial institutions. With the proposed guidelines under the New Basel Accord, financial institutions will benefit from better assessing their risks. The probability of default (PD) and risk-rating class is studied for 157,853 loans in the Seventh Farm Credit District Portfolio. Repayment capacity, owner equity, and working capital origination loans are important determinants of the PD. Standard & Poor's (S&P) reported probabilities of default were used to classify each of the loans into a risk-rating class. The average predicted PD is 1.61%, which would fall into the BB— S&P class. Copyright 2006, Oxford University Press.

Suggested Citation

  • Allen M. Featherstone & Laura M. Roessler & Peter J. Barry, 2006. "Determining the Probability of Default and Risk-Rating Class for Loans in the Seventh Farm Credit District Portfolio," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 28(1), pages 4-23.
    • Handle: RePEc:oup:revage:v:28:y:2006:i:1:p:4-23
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    File URL: http://hdl.handle.net/10.1111/j.1467-9353.2006.00270.x
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    References listed on IDEAS

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    1. Khoju, Madhab R. & Barry, Peter J., 1993. "Business Performance Based Credit Scoring Models: A New Approach to Credit Evaluation," 1993 Regional Committee NC-207, October 4-5, 1993, Chicago, Illinois 131419, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    2. Allen M. Featherstone & Christian R. Boessen, 1994. "Loan Loss Severity of Agricultural Mortgages," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 16(2), pages 249-258.
    3. anonymous, 2001. "Guidance on risk management of leveraged financing," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 413-414.
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