S&P: Recent Developments in Bank Risk Rating Systems

While the appropriate level of complexity of a Bank’s Risk Measurement System is specific to each institution and portfolio type – and we know that- one size does not fit all — we are seeing more and more Banks adopting a “dual risk ratings” process. I should note that a risk rating should not be confused with a credit rating issued by a credit rating agency.

In this dual system, the probability of default (PD) is estimated separately from the loss given default (LGD). The expected loss for