Is there Any Dependence Between Consumer Credit Line Utilization and Default Probability on a Term Loan? Evidence from Bank-Level Data
AbstractWhereas recent studies on revolving lines of credit suggest a positive relationship between exposure at default and default probability on the line, this paper considers the relationship between two financial instruments through the simultaneous analysis of credit line utilization and default probability on a personal loan. We model both financial instruments endogenously in a simultaneous equation system and find strong evidence of a positive relationship between the two instruments. Individuals in the default state use their credit line 59% more than those in the non-default state, and full utilization of the credit line increases the default probability on the loan by 46% when compared with non-utilization. Our results suggest that banks should manage both financial instruments simultaneously.
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Bibliographic InfoPaper provided by CIRPEE in its series Cahiers de recherche with number 1119.
Date of creation: 2011
Date of revision:
Consumer finance; consumer risk management; credit line; term loan; default probability; ability to pay; endogeneity; simultaneous equations;
Find related papers by JEL classification:
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-02 (All new papers)
- NEP-BAN-2011-08-02 (Banking)
- NEP-RMG-2011-08-02 (Risk Management)
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