Credit is always changing and we watch a variety of markers such as corporate bond credit spreads, vacancy rates, net effective rents and many others in order to help us understand credit. Three of those important credit metrics are the probability of default (POD) by industry, the rate of change of that POD and the volatility of credit of each industry. We just got fourth-quarter forward-looking, through cycle probabilities of default in driven by PayNet and have run our analytics.
Given the rise of CECL, the term “probability of default” (POD) and “probability of survival” gets thrown around a lot these days. Ten years ago, these were terms that only credit analysis or portfolio managers truly understood. Now, we see them misused a lot, and more importantly, the concepts are getting muddled. Using PODs are one of the most important tools for understanding credit and all bankers, including those not in loans, should have a basic understanding of how to use these metrics.