Credit risk

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

Disentangling Demand and Supply in Credit Developments: A Survey-Based Analysis for Italy

Abstract: This paper combines qualitative information from the Eurosystem Bank Lending Survey with micro-data on loan prices and quantities for the participating Italian banks to assess the role of supply and demand factors in credit developments, with a focus on the sharp slowdown of 2008-09. Both demand and supply have played a relevant role, especially for lending to enterprises, in the whole sample period and during the financial crisis. A counterfactual exercise shows that the effect of supply factors on the growth of lending to firms was strongest after the Lehman collapse. On average, over the crisis period (2007q3-2009q4) the negative effect on the annualized quarter-on-quarter growth rate of the panel banks’ lending to enterprises can be estimated in a range of 2.2 to 3.1 percentage points, depending on the specification. About one fourth of the total supply effect can be attributed to costs related to the banks’ balance sheet position, the rest to their perception of credit risk.

Determinants of Collateral

Abstract: This paper draws upon the theory of contracting under asymmetric information to postulate and test several hypotheses concerning the relationship between the use and amount of collateral in financial loans to firms, the risk profile of the borrower, business cycle and monetary conditions of the economy, strength of the lending relation between borrower and lender, competition in the credit market and expertise and preferences of the lender. The research takes advantage of a very large panel of data coming from the Credit Register that contains the whole population of loans granted every year from 1984 to 2002 by Spanish banks to firms (approximately two million loans). Important novelties of the paper are that the quality of the borrower is measured in terms of ex ante and ex post credit risk, that the association between credit risk of the borrower and the use of collateral is evaluated in different segments of the credit market (short-term, and long-term loans, and new and old borrowers), which are likely to present differences in the relative information advantage of the borrower over the lender, and that we also control for borrowers' idiosyncratic effects. The evidence confirms that the use of collateral is determined in a predictable, different way in each market segment.

The intersection of market and credit risk

Abstract: Economic theory tells us that market and credit risks are intrinsically related to each other and not separable. We describe the two main approaches to pricing credit risky instruments: the structural approach and the reduced form approach. It is argued that the standard approaches to credit risk management – CreditMetrics, CreditRisk+ and KMV – are of limited value when applied to portfolios of interest rate sensitive instruments and in measuring market and credit risk. Empirically returns on high yield bonds have a higher correlation with equity index returns and a lower correlation with Treasury bond index returns than do low yield bonds. Also, macro economic variables appear to influence the aggregate rate of business failures. The CreditMetrics, CreditRisk+ and KMV methodologies cannot reproduce these empirical observations given their constant interest rate assumption. However, we can incorporate these empirical observations into the reduced form of Jarrow and Turnbull (1995b). Drawing the analogy. Risk 5, 63–70 model. Here default probabilities are correlated due to their dependence on common economic factors. Default risk and recovery rate uncertainty may not be the sole determinants of the credit spread. We show how to incorporate a convenience yield as one of the determinants of the credit spread. For credit risk management, the time horizon is typically one year or longer. This has two important implications, since the standard approximations do not apply over a one year horizon. First, we must use pricing models for risk management. Some practitioners have taken a different approach than academics in the pricing of credit risky bonds. In the event of default, a bond holder is legally entitled to accrued interest plus principal. We discuss the implications of this fact for pricing. Second, it is necessary to keep track of two probability measures: the martingale probability for pricing and the natural probability for value-at-risk. We discuss the benefits of keeping track of these two measures.

The Determinants of Commercial Bank Profitability in Sub-Saharan Africa

Abstract: Bank profits are high in Sub-Saharan Africa (SSA) compared to other regions. This paper uses a sample of 389 banks in 41 SSA countries to study the determinants of bank profitability. We find that apart from credit risk, higher returns on assets are associated with larger bank size, activity diversification, and private ownership. Bank returns are affected by macroeconomic variables, suggesting that macroeconomic policies that promote low inflation and stable output growth does boost credit expansion. The results also indicate moderate persistence in profitability. Causation in the Granger sense from returns on assets to capital occurs with a considerable lag, implying that high returns are not immediately retained in the form of equity increases. Thus, the paper gives some support to a policy of imposing higher capital requirements in the region in order to strengthen financial stability.

Managing Credit Risk:The Next Great Financial Challenge

Abstract: Credit Risk: The Next Great Challenge of the Financial Markets. Credit Culture. Classic Industry Players--Banks, Finance Companies, Insurance Companies, Industrial Companies. Portfolio Managers--Investment Managers Unit Trusts, Mutual Funds, Pension Funds. Structural Hubs--Derivative Dealers, Clearinghouses, and Exchanges. Rating Agencies. Classic Credit Analysis. Asset--Based Lending. Introduction to Credit Risk Models. Credit Risk Models Based on Accounting Data and Market Values. Corporate Credit Risk Models Based on Stock Price. Consumer Finance Models. Credit Models for Small Business, Real Estate, and Financial Institutions. Model Testing and Implementation of Credit Risk Models. Default Rates, Losses, and Recoveries. Credit Risk Migration. Introduction to Portfolio Approaches. Credit Pricing, Risk--Adjusted Return, and Allocation of Capital. Applications of Portfolio Approaches. Credit Derivatives. Credit Risk of Derivatives. Country Risk Models. Structured Finance. A New World Driven by Analytics and Diversifying Agents. The Rediscovery of Culture as a Primary Management Tool. Appendix. Index.