How Accurate Are Credit Risk Models in Their Predictions Concerning Norwegian Enterprises?

Abstract

Historically, banks’ solvency problems are often due to losses on loans to enterprises. Credit risk associated with loans to enterprises is therefore an important aspect when Norges Bank assesses financial stability. Two different credit risk models are used in the analyses, Norges Bank’s SEBRA model and the Moody’s KMV Private Firm model. This article compares the quality of predictions made by the two models. The analysis shows that both models are good at selecting bankruptcy candidates among unlisted Norwegian enterprises and that the SEBRA model is somewhat better than the Moody’s KMV Private Firm model.