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Credit standards and corporate loan default. Insights for macroprudential policy

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  • Fernández Lafuerza, Luis
  • Galán, Jorge E.

Abstract

We provide compelling evidence of the association between credit standards at loan origination in the corporate sector and default risk. While this relationship has been extensively studied in the mortgage market, it remains underexplored in corporate lending. Using a comprehensive dataset from the Spanish credit register merged with firm-level balance sheet information over a full financial cycle, we show that debt-to-assets and interest coverage ratios at loan origination are significant predictors of future corporate loan defaults. The strength of this association varies across the financial cycle, sectors, firm size and age, and prior banking relationships. Real estate firms and small and medium-sized enterprises exhibit the strongest link between initial credit conditions and future default outcomes. Our findings suggest that limits in corporate credit standards, similar to those widely used in mortgage markets, could enhance firms’ resilience to adverse shocks and complement capital-based instruments within the macroprudential toolkit. However, the effectiveness and potential side effects of such measures depend critically on firm-specific characteristics and sectoral heterogeneity, underscoring the need for a targeted and flexible policy design.

Suggested Citation

  • Fernández Lafuerza, Luis & Galán, Jorge E., 2025. "Credit standards and corporate loan default. Insights for macroprudential policy," Journal of Banking & Finance, Elsevier, vol. 181(C).
    • Handle: RePEc:eee:jbfina:v:181:y:2025:i:c:s0378426625001864
    DOI: 10.1016/j.jbankfin.2025.107566
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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