International Journal of Economics, Finance and Management Sciences 2015; 3(1): 1-9 Published online January 19, 2015 (http://www.sciencepublishinggroup.com/j/ijefm) doi: 10.11648/j.ijefm.20150301.11 ISSN: 2326-9553 (Print); ISSN: 2326-9561 (Online) The assessment of the default risk for the banks of the Romanian banking system Sorin Mădălin Vlad 1 , Gheorghe Ruxanda 2 1 The Doctoral School – Economic Cybernetics and Statistics, Bucharest Academy of Economic Studies, Bucharest, Romania 2 Department of Economic Cybernetics, Bucharest Academy of Economic Studies, Bucharest, Romania Email address: sorin_vlad10@yahoo.com (S. M. Vlad), ghrux@ase.ro (G. Ruxanda) To cite this article: Sorin Mădălin Vlad, Gheorghe Ruxanda. The Assessment of the Default Risk for the Banks of the Romanian Banking System. International Journal of Economics, Finance and Management Sciences. Vol. 3, No. 1, 2015, pp. 1-9. doi: 10.11648/j.ijefm.20150301.11 Abstract: By the current study we analyze the performance and plausibility of the empirical results provided by the [5] Duffie and Lando (2001) credit risk structural model with asymmetric information. By construction, such a model can allow the endogenous understanding of the default event (typically for a structural model), the plausibility of the default intensity existence (typically for a reduced form model), as well as the tractability of analytical formulas to be used at the estimation of the credit risk parameters. Under this framework we analyze the empirical model results, by the quantitative creditworthiness assessment of the banks from the Romanian banking system, as financial institutions of a low default portfolio. For the model implementation we apply a special calibration approach for the accounting white noise parameter. The empirical study is being conducted by the use of the banks’ financial statement time series over the last Romanian economic cycle, during the period 2002 – 2012. Keywords: Default, Information Asymmetry, Default Probability, Default Intensity, Banks’ Assessment 1. Introduction Compared to the classical structural models ([16] Merton (1974), [3] Black – Cox (1976)), the theoretical and methodological framework of the default prediction is missing the information concept and its progressive unfolding over time. This kind of structural models have the imbedded assumption that the information used at the model calibration and model use is fully available to the corporate debt investors (respectively, both the corporate debt investors and the firm’s shareholders poses the same information level). By this methodological set up, the model inputs and parameters are presumptively known. However, the rational of these models seems to be counterintuitive as far as the reality has been shown us that the firm’s asset value, the asset volatility and asset return are not visible measures. The financial statements that usually contain the proper information to assess the right firm’s distance to default are difficult to be interpreted. These issues are furthermore reflected in the model results which are not fitting in the end with the economic sense of the empirical evidence. [5] Duffie and Lando (2001) is the first paper approaching a credit risk structural model with the asymmetric information assumption imbedded, where the corporate debt investors cannot notice the real value of the firm’s asset value. However, not perfectly informed, the corporate debt investors receive the firm’s accounting asset value from the published financial statements at certain moments of time. These accounting asset values shall be considered as a benchmark for the real value of the firm’s asset value over time. Besides, to overcome the information incompleteness, the model has the assumption that the default barrier of the firm can be known by the corporate debt investors. In the next sections of the article we brief the key concepts behind [5] Duffie and Lando (2001) model and we focus in depth on the understanding of its performance tested with the empirical data of the banks from the Romanian banking system. 2. The Model 2.1. The General Assumptions We present further in this section [5] Duffie and Lando (2001) model, as a methodological instrument in our empirical study. [5] Duffie and Lando (2001) model assumes that the default barrier of the firm is known to the stakeholders (corporate debt investors) of the firm, in the sense that they can infer it using the [11] Leland (1994) model.