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Since Basel II requires banks to utilize pooled PDs per rating grade / segment, I wonder why exactly. Via a logistic regression you can directly estimate an obligors PD, why the extra step to pool them back together?

E.g. why take a small corporate exposure with a PD of, say 0.31% stemming from a logit model, and calibrate it to the long-run average default rate of, say 0.4% for the segment of small corporate exposures.

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  • $\begingroup$ Not sure, my experience is that the information loss by pooling to master credit rating scales is minimal (Gini etc. don't decrease much). $\endgroup$
    – Trevor Hansen
    Jul 7, 2021 at 15:09

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