Default Rates in the Loan Market for SMEs: Evidence from Slovakia

Banks entering an emerging market face a lot of uncertainty about the risks involved in lending. We use a unique unbalanced panel of nearly 700 short term loans made to SMEs in Slovakia between January 2000 and June 2005. Of the loans granted, on average 6.0 per cent of the firms defaulted. Several probit models and panel probit models show that liquidity and profitability factors are important determinants of SMEs defaults, while debt factors are less robust. However, we find that above average indebtedness significantly increases the probability of default. Moreover, the legal form that determines liability has important incentive effects.http://deepblue.lib.umich.edu/bitstream/2027.42/57234/1/wp854 .pd

Determinants of Households’ Overdue Loans in Romania

The paper’s target is to identify macroeconomic and financial variables that are relevant for the evolution and forecassting of the household’s overdue loans in Romania. By employing vector autoregression and systems of ecuations using the SUR methodology, the authors are trying to respond to the following questions: (1) Which are the lags and the individual intensities of the macroeconomic relevant indicators when affecting the household overdue loans rate?; (2) What are the characteristics of the loans reimbursement behavior in case of shocks on the labor, monetary, goods and services markets? The empirical analysis is based on monthly data which allows for assessing the quality of household loan repayment, both in terms of number of overdue loans and in terms of overdue loan volumes. The relevant explanatory variables were used in various configurations and lags for constructing several macroeconomic credit risk models.Overdue Loans, Money, FX Markets, Labor, Goods, Services, Financial Stability

Scope for Credit Risk Diversification

This paper considers a simple model of credit risk and derives the limit distribution of losses under different assumptions regarding the structure of systematic risk and the nature of exposure or firm heterogeneity. We derive fat-tailed correlated loss distributions arising from Gaussian risk factors and explore the potential for risk diversification. Where possible the results are generalised to non-Gaussian distributions. The theoretical results indicate that if the firm parameters are heterogeneous but come from a common distribution, for sufficiently large portfolios there is no scope for further risk reduction through active portfolio management. However, if the firm parameters come from different distributions, then further risk reduction is possible by changing the portfolio weights. In either case, neglecting parameter heterogeneity can lead to underestimation of expected losses. But, once expected losses are controlled for, neglecting parameter heterogeneity can lead to overestimation of risk, whether measured by unexpected loss or value-at-risk

How costly are debt crises?

The aim of this paper is to assess the short and medium-term impact of debt crises on GDP. Using an unbalanced panel of 154 countries from 1970 to 2008, the paper shows that debt crises produce significant and long-lasting output losses, reducing output by about 10 percent after 8 years. The results also suggest that debt crises tend to be more detrimental than banking and currency crises. The significance of the results is robust to different specifications, identification and endogeneity checks, and datasets.Output Losses; Debt Crises; Sovereign Defaults.

Default Rates in the Loan Market for SMEs:Evidence from Slovakia

The current crisis raises the question whether loans to SMEs in emerging markets areinherently more risky. We use a unique unbalanced panel of nearly 700 loans made toSMEs in Slovakia between 2000 and 2005. Several probit and panel probit models showthat liquidity and profitability factors are important determinants of SME defaults.Moreover, we find that indebtedness significantly increases the probability of default.Finally, liability as proxied by the legal form of SMEs has important incentive effects.In sum, default rates and factors converged to values found in developed financialmarkets.SMEs, banking, loan default, incentives, asymmetric information, probit, financial crisis

Reduced form models of bond portfolios

We derive simple return models for several classes of bond portfolios. With only one or two risk factors our models are able to explain most of the return variations in portfolios of fixed rate government bonds, inflation linked government bonds and investment grade corporate bonds. The underlying risk factors have natural interpretations which make the models well suited for risk management and portfolio design

Derivatives and Credit Contagion in Interconnected Networks

The importance of adequately modeling credit risk has once again been highlighted in the recent financial crisis. Defaults tend to cluster around times of economic stress due to poor macro-economic conditions, {\em but also} by directly triggering each other through contagion. Although credit default swaps have radically altered the dynamics of contagion for more than a decade, models quantifying their impact on systemic risk are still missing. Here, we examine contagion through credit default swaps in a stylized economic network of corporates and financial institutions. We analyse such a system using a stochastic setting, which allows us to exploit limit theorems to exactly solve the contagion dynamics for the entire system. Our analysis shows that, by creating additional contagion channels, CDS can actually lead to greater instability of the entire network in times of economic stress. This is particularly pronounced when CDS are used by banks to expand their loan books (arguing that CDS would offload the additional risks from their balance sheets). Thus, even with complete hedging through CDS, a significant loan book expansion can lead to considerably enhanced probabilities for the occurrence of very large losses and very high default rates in the system. Our approach adds a new dimension to research on credit contagion, and could feed into a rational underpinning of an improved regulatory framework for credit derivatives.Comment: 26 pages, 7 multi-part figure

Default Rates in the Loan Market for SMEs: Evidence from Slovakia

Banks entering an emerging market face a lot of uncertainty about the risks involved in lending. We use a unique unbalanced panel of nearly 700 shortterm loans made to SMEs in Slovakia between January 2000 and June 2005. Of the loans granted, on average 6.0 per cent of the firms defaulted. Several probit models and panel probit models show that liquidity and profitability factors are important determinants of SMEs defaults, while debt factors are less robust. However, we find that above average indebtedness significantly increases the probability of default. Moreover, the legal form that determines liability has important incentive effects.SME, Credit, Loan Default, Mortality Rates, Incentives, Probit, Panel Data