I have to calculate probability of default (PD) rates for our clients (I am working in a Bank) based on clients' financials. Could you, please, advise me how to do that?

I think we have two Options: 1. Calculate PDs for each client based on their financial Statements, 2. We have internal ratings (again based on financials) that we are using for assessment of the clients, and we can calculate PD for every internal rating.

Could you please advise, is it possible to do that with one of the above-mentioned Options and how?

Thanks in advance,

  • 1
    $\begingroup$ The Altman Z-score is the best known measure and it has many variants. If you are looking for default probability of bank, for example, the original Altman Z must be modified to fit banks' financial reporting schema. If you could provide a little more detail on what types of companies and/or individuals you have to evaluate, that would help us give a more specific answer. $\endgroup$ – David Addison Mar 14 '17 at 0:35

Merton model will be a bit more quantitiative.

Z-Score is an option, as is Ohlson.

In the end you are going to want some non-defaulted->defaulted transition mapping based on factors you identify as meaningful.


Take a look at the Altman Z Score, sounds like it is what you are looking for - https://en.wikipedia.org/wiki/Altman_Z-score


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