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Looking at five major industries within the U.S. economy, Sageworks found that the probabilities of default for construction, manufacturing, wholesale trade, retail trade and professional/scientific/technical services have each improved compared with a year earlier.
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Alone among Japanese banks, it adopted the probabilities-of-default technique used in the United States and is one of the few Japanese financial institutions to list its shares on the New York Stock Exchange.
Those cash flows take into account "the probability of default each year, the recovery rate on defaulted loans, the planned repayment (amortization) schedule of a loan, estimated voluntary prepayments, and the fee schedule". Basically, everything that could possibly affect what money's going out and what money's coming in.
In a presentation to the agency's supervision summit meeting last Wednesday in Washington, Ms. Tavakoli said that if the agency hoped to determine the credit risk lurking inside Fannie and Freddie, it needed to ascertain two things: the probability of default on those loans and the loss rates when probable defaults actually occur.
"What is the probability of default?
The probability of default on Treasury is zero.
The credit spread reflects the probability of default.
Informational rents are associated with the probability of default.
In an improving market, the probability of default falls.
A rating is simply an estimate of the probability of default.
Those factors made no difference to the agencies, however, which based their ratings strictly on the probability of default.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com