Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics

39 Pages Posted: 27 Feb 2007 Last revised: 13 Jan 2009

See all articles by Diana Bonfim

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Date Written: 2006

Abstract

Understanding 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 firms' characteristics, the results seem to improve substantially. Hence, though the firms' 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.

Keywords: credit risk, default probability, corporate loans, probit models, duration analysis

JEL Classification: G21, G33, E32, C25, C41

Suggested Citation

Bonfim, Diana, Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics (2006). Journal of Banking and Finance, Vol. 33, No. 2, 2009, Available at SSRN: https://ssrn.com/abstract=965746 or http://dx.doi.org/10.2139/ssrn.965746

Diana Bonfim (Contact Author)

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
702
Abstract Views
2,642
rank
45,137
PlumX Metrics