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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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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.
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Document Type: Research Article

Affiliations: 1: Allen M. Featherstone is a professor of Agricultural Economics at Kansas State University. 2: Laura M. Roessler is a master of Agribusiness graduate student at Kansas State University. 3: Peter J. Barry is a professor of Agricultural Economics at the University of Illinois.

Publication date: March 1, 2006

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