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Determinants of default: Evidence from a sector-level panel of Irish SME loans

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  • Lawless, Martina

    (Central Bank of Ireland)

  • McCann, Fergal

    (Central Bank of Ireland)

Abstract

This paper uses unique SME loan-level data complete with quarterly loan ratings assigned by the lend- ing institution over the period 2008-2010. This allows us to examine the evolution of loan performance throughout the period of economic and financial crisis. We document the shift in the distribution of loans across ratings as economic conditions deteriorated, but also show that this effect was heteroge- neous across sectors. In panel data estimations, changes in employment across sectors are shown to be a leading indicator of loan performance, demonstrating the importance of the link between real economy demand and loan impairment. Levels of outstanding credit in a sector cannot explain cur- rent loan performance. However, in keeping with a growing literature on the dangers of post-boom debt overhang, we calculate a measure of excess credit using deviations from a long-run trend that is strongly associated with higher levels of current impairment. This provides new evidence on the effect of relaxed credit standards during a boom on crisis-era loan delinquency.

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Bibliographic Info

Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 03/RT/12.

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Date of creation: Jul 2012
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Handle: RePEc:cbi:wpaper:03/rt/12

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  1. Jarko Fidrmuc & Christa Hainz, 2009. "Default Rates in the Loan Market for SMEs:Evidence from Slovakia," Ifo Working Paper Series Ifo Working Paper No. 72, Ifo Institute for Economic Research at the University of Munich.
  2. McCann, Fergal & McIndoe-Calder, Tara, 2012. "Determinants of SME Loan Default: The Importance of Borrower-Level Heterogeneity," Research Technical Papers 06/RT/12, Central Bank of Ireland.
  3. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
  4. Kelly, Robert, 2011. "The Good, The Bad and The Impaired - A Credit Risk Model of the Irish Mortgage Market," Research Technical Papers 13/RT/11, Central Bank of Ireland.
  5. Lawless, Martina & McCann, Fergal & McIndoe-Calder, Tara, 2012. "SMEs in Ireland: Stylised facts from the real economy and credit market," Quarterly Bulletin Articles, Central Bank of Ireland, pages 99-123, April.
  6. Lawless, Martina & McCann, Fergal, 2012. "The Irish SME lending market - a snapshot, December 2010," Economic Letters 03/EL/12, Central Bank of Ireland.
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