What are the steps in the determination of the default probability of a firm?

What are the steps in the determination of the default probability of a firm? 

Ans. The Probability of Default is the likelihood that a loan will not be repaid and fall into default. This PD will be calculated for each company who has a loan. The credit history of the counterparty and nature of the investment will all be taken into account to calculate the PD figures. Many banks will use external ratings agencies such as Standard and Poor. However, banks are also encouraged to use their own Internal Rating Methods as well. NEERAJ : FINANCIAL INSTITUTIONS AND MARKETS The following step will commonly be used 

Analyze the credit risk aspects of the counterparty. 

Map the counterparty to an internal risk grade which has an associated PD; and 

Determine the facility specific PD. This last step will gives a weighted Probability of Default for facilities that are subject to a guarantee or protected by a credit derivative. The weighting takes account of the PD of the guarantor or seller of the credit derivative. 

Probability of Default (PD) for the “Other” segment: is derived from a credit scoring process for a new customer and behavioral scoring for existing business. The resulting PD is mapped to an internal risk grade. 

(PD) of an Obligor can be derived from an Internal Rating model that is used and maintained within the business area responsible for the counterparty relationship. For the purposes of the Accord there will be one PD associated with each risk grade representing the probability of Default within a 1 year time period. Probability at default.