We use a vector error correction model to study the long-term relationship between aggregate expected default frequency and the macroeconomic development, i.e. CPI, industry production and short-term interest rate. The model is used to forecast the median expected default frequency of the...

Extensive work is now in progress around the world to create a more stable financial system. An important part of this work is to tighten the requirements on the banks' capital adequacy. There is abundant research on optimal capital levels from the micro perspective, but few studies try to...