Inferred Rate of Default as a Credit Risk Indicator in the Bulgarian Bank System

Abstract

The inferred rate of default (IRD) was first introduced as an indicator of default risk computable from information publicly reported by the Bulgarian National Bank. We have provided a more detailed justification for the suggested methodology for forecasting the IRD on the bank-group- and bank-system-level based on macroeconomic factors. Furthermore, we supply additional empirical evidence in the time-series analysis. Additionally, we demonstrate that IRD provides a new perspective for comparing credit risk across bank groups. The estimation methods and model assumptions agree with current Bulgarian regulations and the IFRS 9 accounting standard. The suggested models could be used by practitioners in monthly forecasting the point-in-time probability of default in the context of accounting reporting and in monitoring and managing credit risk.