1. Modeling structural default risk
for allocating deposits to money market
counterparties
Basis: Agusto Ratings, Fitch Weights, Edward Altman’s “Z-score” model
parameters for financial institutions, Merton/ Moody’s KMV Model(time)
All ratings 2009 for 2010 placements
2. Demonstration of methodology
• each plot covers the period of prior to intervention
announcements by the CBN:
• assigned z-scores were trended for the period to reflect firm
and market changes
• these bear a simple rating system:
• Z < 1.8 = “default”,
• 1.8< Z <3.0 “troubled credit”
• ….> 3.0 “Okay”
3. Basis of allocation to counterparties…
After data entry on the internal spread;
All inputs are entered from each firm’s financials and
transformed into comprehensive weights before assigning
a score to allocate permissible weights.
Qualitative factor’s may change the final output
G.Rev/
Factor WC/TA RE/TA EBIT/TA MVE/TL T.Assets Z-Score % Allocation Year End
Multiple 1.20 1.40 3.30 0.60 1.00
ACCESS 0.93 0.05 0.05 106.21 0.03 6.51 4.20% 31-Mar-08
AFRIBANK 0.45 0.02 0.04 64.68 0.04 3.96 2.55% 29-Feb-08
PLATINUM 1.06 0.08 0.07 24.64 0.05 1.65 1.06% 29-Feb-08
DIAMONDBNK 0.73 0.07 0.05 267.34 0.05 16.16 10.43% 31-Dec-08
FIDELITYBK 1.09 0.07 0.07 192.75 0.05 11.73 7.57% 31-Dec-08
FIRSTINLND 0.68 0.08 0.10 45.92 0.08 2.89 1.86% 29-Feb-08
FIRSTBANK 0.61 0.09 0.12 209.18 0.07 12.68 8.19% 02-Jun-08
4. Jan 2008-July 2010: the black lines represent computed z-scores, the
coloured lines reflect forecast levels
Z<1.8 = “default”, 1.8<Z<3.0 “troubled credit”….>3.0 “Okay”
5. Jan 2008-July 2010: the black lines represent computed z-scores, the
coloured lines reflect forecast levels
Z<1.8 = “default”, 1.8<Z<3.0 “troubled credit”….>3.0 “Okay”
6. Jan 2008-July 2010: the black lines represent computed z-scores, the
coloured lines reflect forecast levels
Z<1.8 = “default”, 1.8<Z<3.0 “troubled credit”….>3.0 “Okay”
Below required score …future
looked manageable
7. Jan 2008-July 2010: the black lines represent computed z-scores, the
coloured lines reflect forecast levels
Z<1.8 = “default”, 1.8<Z<3.0 “troubled credit”….>3.0 “Okay”
Clear sign of default