Credit risk

About: Credit risk is a research topic. Over the lifetime, 18595 publications have been published within this topic receiving 382866 citations.

Hazardous Times for Monetary Policy: What do Twenty-three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk?

Abstract: We investigate the impact of the stance and path of monetary policy on the level of credit risk of individual bank loans and on lending standards. We employ the Credit Register of the Bank of Spain that contains detailed monthly information on virtually all loans granted by all credit institutions operating in Spain during the last twenty-two years – generating almost twenty-three million bank loan records in total. Spanish monetary conditions were exogenously determined during the entire sample period. Using a variety of duration models we find that lower short-term interest rates prior to loan origination result in banks granting more risky new loans. Banks also soften their lending standards – they lend more to borrowers with a bad credit history and with high uncertainty. Lower interest rates, by contrast, reduce the credit risk of outstanding loans. Loan credit risk is maximized when both interest rates are very low prior to loan origination and interest rates are very high over the life of the loan. Our results suggest that low interest rates increase bank risk-taking, reduce credit risk in banks in the very short run but worsen it in the medium run. Risk-taking is not equal for all type of banks: Small banks, banks with fewer lending opportunities, banks with less sophisticated depositors, and savings or cooperative banks take on more extra risk than other banks when interest rates are lower. Higher GDP growth reduces credit risk on both new and outstanding loans, in stark contrast to the differential effects of monetary policy.

Monetary Policy, Housing Booms and Financial (Im) Balances

Abstract: This paper uses a factor-augmented vector autoregressive model (FAVAR) estimated on U.S. data in order to analyze monetary transmission via private sector balance sheets, credit risk spreads and asset markets in an integrated setup and to explore the role of monetary policy in the three imbalances that were observed prior to the global financial crisis: high house price inflation, strong private debt growth and low credit risk spreads. The results suggest that (i) monetary policy shocks have a highly significant and persistent effect on house prices, real estate wealth and private sector debt as well as a strong short-lived effect on risk spreads in the money and mortgage markets; (ii) monetary policy shocks have contributed discernibly, but at a late stage to the unsustainable developments in house and credit markets that were observable between 2001 and 2006; (iii) financial shocks have influenced the path of policy rates prior to the crisis, and the feedback effects of financial shocks via lower policy rates on property and credit markets are found to have probably been considerable.

Random Survival Forests Models for SME Credit Risk Measurement

Abstract: This paper extends the existing literature on empirical research in the field of credit risk default for Small Medium Enterprizes (SMEs). We propose a non-parametric approach based on Random Survival Forests (RSF) and we compare its performance with a standard logit model. To the authors' knowledge, no studies in the area of credit risk default for SMEs have used a variety of statistical methodologies to test the reliability of their predictions and to compare their performance against one another. As for the in-sample results, we find that our non-parametric model performs much better that the classical logit model. As for the out-of-sample performances, the evidence is just the opposite, and the logit performs better than the RSF model. We explain this evidence by showing how error in the estimates of default probabilities can affect classification error when the estimates are used in a classification rule.

Credit card debt on college campuses: causes, consequences, and solutions

Abstract: Credit card debt is a burgeoning problem on campuses. Although most students handle credit well, a significant minority get into debt. Causes include beliefs about future earnings, debt attitudes and financial knowledge. Many students have not had financial training and, among those who have, classes do not necessarily cause behavioral changes. Colleges, parents, and public policy makers must work together to combat the problem of student consumer debt. Suggestions are made for college policy with respect to credit card solicitation. ********** "I've called several attorneys and my question is how can they charge so much for bankruptcy when you already don't have any money? How much do you charge?" These are questions you might expect to hear in a bankruptcy attorney's office. Instead, the inquiries were from a young woman at a seminar on managing credit card debt led by a local attorney given on our college campus. Credit cards have become a fact of life on college campuses. With a reported $13 billion in discretionary income, college students represent a huge market for credit card companies (Kara, Kaynak, & Kucukemiroglu, 1994). Students often receive incentives, such as t-shirts or mugs, to apply for cards, and requirements, such as previous credit history, are often waived (Kara et al, 1994). Due in large part to these marketing efforts, a recent study reported that approximately 70 percent of college students possess at least one credit card--a number much higher than previously thought (Manning, 1999), while another study reported that 93 percent of college seniors have acquired at least one card (Markovich & DeVaney, 1997). Colleges, too, have embraced the idea of credit cards among their students. According to one study, 77 percent of colleges reported accepting credit cards for payment of tuition (National Association of College and University Business Officers, 1995). Further, many colleges allow companies to solicit students and alumni with imprint cards, cards personalized with the institution's logo. Colleges then receive money, either in a lump sum, an amount for each completed application, or, in some cases, a percent of the amount charged by those possessing the cards. Credit card companies often are allowed to seek business on campus. For example, at some institutions, student groups may sponsor credit card companies who wish to solicit applications. Both sides appear to benefit from this arrangement. The student group receives a set dollar amount for each application received, and the company is able to set up a table one day a week in the student union. Most Students Manage Credit Well For most students, this easy access to credit is not an issue. Studies indicate that most students manage credit wisely. The 1998 TERI (The Education Resources Institute) Credit Risk or Credit Worthy study reported that 59 percent of students pay off their credit cards monthly. Others have estimated that only one in ten students is irresponsible with credit card use (Stanford, 1999). Indeed, the TERI study reported that most students report using and having credit cards in order to build a credit history and for use in emergencies. The study further reported that 82 percent of students with credit cards had balances of $1000 or less. Credit Card Debt is a Problem for Many However, despite the fact that the majority of students do well managing their finances, a significant portion do not. Manning (1999) reported an average credit card debt of $2,226 while Norvilitis, Szablicki, and Wilson (in press) found an average debt of $1,518 among all students. The consequences can be serious. There have been at least two cases widely reported in the media of college students who took their lives in part because of their credit card debt. Sean Moyer was a 22-year-old student with $10,000 of debt and Mitzi Pool was a 19-year-old student with $2,500 in debt. …