EU banks’ credit risk estimates stabilised at year-end

Probability of default (PD) estimates for corporate borrowers – as gauged by European Union banks’ internal ratings-based (IRB) models – edged lower in Q4 2020 and, for some countries, ended the year tighter than in 2019 despite the ravages of the coronavirus pandemic.

The mean weighted average (WA) PD of corporate exposures for counterparties across 39 countries was 2.15% in Q4 2020, barely changed from 2.14% the year-ago quarter. However, it did represent a big increase on the low of 1.92% reported for Q1 2020.

The mean WA loss-given default (LGD) estimate was 36.02%, up from 34.92% the year before and the highest ratio disclosed for 2020 as a whole.


Corporate PDs ranged from 0.63% for Russian counterparties to 6.92% for Greek borrowers. LGD values were lowest for Danish corporates, at 22.2%, and highest for Norwegian companies, at 47.65%.

WA PDs increased most year on year for corporate borrowers in India, by 106 basis points to 3.94%. They fell the most for Maltese corporates, by 361bp to 4.65%.

As for retail exposures, IRB models produced a mean WA PD of 1.89% for these in Q4 2020 across the countries included, down from 1.91% a year prior.

The mean WA LGD estimate for retail exposures was 24.48%, slightly lower than the 25.87% average for Q4 2019.

Swedish retail borrowers were assigned the lowest WA PD estimates, at 0.36%, and Greek borrowers the highest, at 9.57%. However, the PD for the latter group was markedly reduced from the 16.21% reported for Q1.

Retail LGD values were lowest for Maltese debtors, at 11.36%, and highest for Indian debtors, at 54.5%.

WA retail PD values crept up the most for Indian borrowers year on year, by 355bp to 7.68% and fell the sharpest for Greek obligors, by 519bp.

The WA default rate across countries sampled was 2% for corporate borrowers and 1.23% for retail borrowers as of Q4 2020, compared with 1.92% and 1.37% for Q4 2019, respectively.


What is it?

The European Banking Authority produces quarterly credit risk parameters, based on data provided by EU banks that use internal-ratings based approaches. The disclosure is intended to increase transparency on the default rate, loss rate, PD and LGD of the retail and corporate counterparties of EU banks.

PDs are computed as a weighted average of non-defaulted exposures. Only statistics for countries with more than three banks reporting in that particular country are shown.

Why it matters

It’s possible that the slew of government support measures introduced by states around the world following the outbreak of the Covid-19 pandemic helped shore up the creditworthiness of both corporate and retail borrowers in the last quarter of the year, together with brighter, forward-looking economic forecasts following the start of the global vaccination drive.

There’s little that unites the countries for which EU banks disclosed the most significant increase in PDs over the year. Ireland and Spain are both countries with a history of shaky sovereign and private credit, which may explain the higher PDs assigned to borrowers in these jurisdictions. As for Croatia, Estonia and Lithuania, they’re all emerging European economies that may have suffered a drop in cross-border investment since the crisis.

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