Credit Risk Models: An Application to Agricultural Lending
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Credit risk models are developed and used to estimate capital requirements for agricultural
lenders under the New Basel Capital Accord. The theoretical models combine Merton’s
distance-to-default approach with credit value-at-risk methodologies. Two applied models,
CreditMetrics and KMV, are illustrated using farm financial data. Expected and unexpected
losses for a portfolio of farms are calculated using probability of default, loss given default, and
portfolio risk measures. The results show that credit quality and correlations among farms play a
significant role in risk pricing for agricultural lenders.