Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics
AbstractUnderstanding why some firms default, while others do not, is an important issue for the assessment of financial stability. In this domain, it may be interesting to understand if credit risk is driven mostly by idiosyncratic firm characteristics or by systematic factors, which simultaneously affect all firms. In order to empirically examine the determinants of loan default, we begin by exploring the links between credit risk and macroeconomic developments at an aggregate level. The results obtained seem to confirm the hypothesis that in periods of economic growth, which are sometimes accompanied by strong credit growth, there may be some tendency towards excessive risk-taking, even though the imbalances created in such periods only become apparent when economic growth slows down. After examining the determinants of credit risk at an aggregate level, we focus our attention on an extensive dataset with detailed financial information for more than 30.000 firms. The results obtained suggest that default probabilities are influenced by several firm-specific characteristics, such as their financial structure, profitability and liquidity, as well as by their recent sales performance or their investment policy. When time-effect controls or macroeconomic variables are taken into account together with the firmsâ characteristics, the results seem to improve substantially. Hence, though the firmsâ financial and operational situation has a central role in explaining default probabilities at the micro level, overall macroeconomic conditions are also very important when assessing default probabilities over time.
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Bibliographic InfoArticle provided by Banco de Portugal, Economics and Research Department in its journal Financial Stability Report.
Volume (Year): (2006)
Issue (Month): ()
Other versions of this item:
- Bonfim, Diana, 2009. "Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 281-299, February.
- Diana Bonfim, 2007. "Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics," Working Papers w200707, Banco de Portugal, Economics and Research Department.
- C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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