Probability of default (PD)
What is probability of default in credit risk?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
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Probability of default is the estimated likelihood that a borrower defaults within a given period, usually a year, which a bank derives from the borrower's risk grade through its rating model. It is one of the three factors of expected loss, beside loss given default and exposure at default, and it describes the borrower rather than the loan: one company has one probability of default however its facilities are secured. A grade migration changes it, and with it the capital the bank must hold and the margin it needs.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
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