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Comparison of default probability models: Russian experience

Author

Listed:
  • Alexander Karminsky

    (National Research University Higher School of Economics)

  • Alexander Kostrov

    (National Research University Higher School of Economics)

  • Taras Murzenkov

    (National Research University Higher School of Economics, Graduate student)

Abstract

Under the Basel II accord, improving probability of default models is a key risk-management priority. There are four main aspects of this research: suggesting the bank default classification; using a wide time horizon (quarterly Russian banking statistics from 1998 to 2011); investigating the macroeconomic and institutional characteristics of the banking sector environment and finally, testing the accuracy of the models developed. We have employed nonlinearity and automatic classification of the independent variables in our models, paying attention to the structure of the banking market as well as to the reliability of the models developed. We have compared several models for estimating default probabilities. From the results of this comparison, we have chosen the binary logit – regression with quasi panel data structure. Our key findings are: - There is a quadratic relationship between bank’s capital adequacy ratio and its probability of default. - The “too big to fail” hypothesis does not hold for the Russian banking sector. - There is a negative relationship between the Lerner index and bank’s PD. - Macroeconomic, institutional and time factors significantly improve the model quality. We believe that these results will be useful for the national financial regulatory authorities as well as for risk-management in commercial banks. Moreover, we think that these models will be valuable for other emerging economies.

Suggested Citation

  • Alexander Karminsky & Alexander Kostrov & Taras Murzenkov, 2012. "Comparison of default probability models: Russian experience," HSE Working papers WP BRP 06/FE/2012, National Research University Higher School of Economics.
    • Handle: RePEc:hig:wpaper:06/fe/2012
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    File URL: http://www.hse.ru/data/2012/09/26/1245208112/06FE2012.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Błażej Prusak, 2018. "Review of Research into Enterprise Bankruptcy Prediction in Selected Central and Eastern European Countries," IJFS, MDPI, vol. 6(3), pages 1-28, June.
    2. Mikhail Mamonov, 2013. "Bad management, skimping, or both? The relationship between cost efficiency and loan quality in Russian banks," HSE Working papers WP BRP 19/FE/2013, National Research University Higher School of Economics.
    3. Mamonov, Mikhail, 2012. "The impact of market power of Russian banks on their credit risk tolerance: A panel study," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 28(4), pages 85-112.

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    More about this item

    Keywords

    probability of default; PD; banks; Russia; risk-management; default classification;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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