ESTIMATING PROBABILITY OF DEFAULT IN BANKING SECTOR – THE ACTUARIAL METHOD

Abstract

In countries with insufficiently developed capital market and a bankocentric financial system, the probability of default of banking clients can be estimated using an actuarial method. This method uses historical data from banking portfolios on the cases of debtors’ inability to meet their obligations towards the bank. In order to assess the level of credit risk and to identify its determinants, we calculated default rates by homogeneous groups of business entities as debtors, and by homogeneous groups of banks through the application of the actuarial method on empirical data from the banking sector of the Republic of Serbia. The research results show that there are differences in the level of credit risk, depending on the size of the business entity and its business sector, as well as that the entities with lower earning capacity, higher indebtedness and slower turnover of assets are more inclined to default. At the same time, it is shown that the default rate of bank varies depending on the ownership type, the bank’s size, profitability, capitalization and certain characteristics of its portfolio. The obtained results are the basis for analyzing the credit risk of certain categories of debtors and banks and for selecting variables that will be included in econometric models for assessing the level of credit risk in the banking sector in Serbia.