scholarly journals Probability of Default Model to Estimate Ex Ante Credit Risk

2021 ◽  
Vol 80 (3) ◽  
pp. 49-72
Author(s):  
Anna Burova ◽  
◽  
Henry Penikas ◽  
Svetlana Popova ◽  
◽  
...  
Keyword(s):  
Credit Risk ◽  
Interest Rates ◽  
Risk Taking ◽  
Financial Ratios ◽  
Probability Of Default ◽  
Financial Position ◽  
Portfolio Composition ◽  
Ex Ante ◽  
Alternative Measures ◽  
One Year

A genuine measure of ex ante credit risk links borrower’s financial position with the odds of default. Comprehension of a borrower’s financial position is proxied by the derivatives of its filled financial statements, i.e., financial ratios. We identify statistically significant relationships between shortlisted financial ratios and subsequent default events and develop a probability of default (PD) model that assesses the likelihood of a borrower going into delinquency at a one-year horizon. We compare the PD model constructed against alternative measures of ex ante credit risk that are widely used in related literature on bank risk taking, i.e., credit quality groups (prudential reserve ratios) assigned to creditors by banks and the credit spreads in interest rates. We find that the PD model predicts default events more accurately at a horizon of one year compared to prudential reserve rates. We conclude that the measure of ex ante credit risk developed is feasible for estimating risk-taking behaviour by banks and analysing shifts in portfolio composition.

The relationship between competition and risk-taking behaviour of Indian banks

2016 ◽  
Vol 8 (1) ◽  
pp. 95-119 ◽  
Author(s):  
Sanjukta Sarkar ◽  
Rudra Sensarma
Keyword(s):  
Interest Rates ◽  
Risk Taking ◽  
Banking Sector ◽  
Banking Competition ◽  
Content Type ◽  
Regression Methods ◽  
Alternative Measures ◽  
Structural Measure ◽  
Indian Banks ◽  
The Relationship

Purpose Under the traditional franchise value paradigm, competition in banking markets is considered to be risk enhancing because of its tendency to raise interest rates on deposits. Taking a contrarian view, Boyd and De Nicolo (2005) have argued that competition in the loan market can lead to lower interest rates and hence reduce bank risk-taking. Following these contradictory theoretical results, the empirical evidence on the relationship between risk and competition in banking has also been mixed. This paper analyses the competition–stability relationship for the Indian banking sector for the period 1999-2000 to 2012-2013. Design/methodology/approach Banking competition is measured using structural measures of concentration, namely, five-bank concentration ratios and the Herfindahl-Hirschman Index as well as a non-structural measure of competition – the Panzar-Rosse H-Statistic. Panel regression methods are used to estimate the relationships. Findings Our results show that while concentration leads to lower levels of default, market and asset risks, it exacerbates the levels of capital and liquidity risks. Practical implications These results have interesting implications for banking sector policy in emerging economies. For instance, any strategy on entry of new banks has to be carefully coordinated with supervisory efforts and macro-prudential policy to derive the benefits of greater competition in the banking industry. Originality/value This is the first paper that analyses the competition – stability relationship using a large number of alternative measures for the banking sector, an emerging economy.

Measures of firm risk-taking: revisiting Bowman’s paradox

2019 ◽  
Vol 46 (3) ◽  
pp. 421-434
Author(s):  
Lujer Santacruz
Keyword(s):  
Risk Taking ◽  
Negative Relationship ◽  
Theory Development ◽  
Financial Ratios ◽  
Firm Risk ◽  
Firm Level ◽  
Accounting Data ◽  
Content Type ◽  
Alternative Measures

Purpose The purpose of this paper is to contribute to the existing literature on the relationship between firm-level risk and returns and to explore other ways of measuring firm risk-taking. Literature overwhelmingly shows a negative relationship between firm-level risk and returns based on accounting data, which is counter-intuitive from the rational perspective of risk-aversion. This paper revisits this so-called Bowman’s paradox by examining the wealth of literature on the topic and empirically tests alternative measures of firm risk-taking that could provide a counter-argument on the existence of the paradox. Design/methodology/approach After formulating the criteria for such a measure, potential measures of firm risk-taking were developed based on variability of some key financial ratios and empirically tested using US listed companies’ data for several time periods from 1992 to 2016. Literature has explored the use of these financial ratios (e.g. R&D expenses as percentage of sales) based only on their magnitude. This paper is novel in that it examines the variability and not just the magnitude of these parameters. Findings Results showed the same counter-intuitive negative relationship between firm risk-taking and returns but the paper was able to identify an area for future theory development that hopefully will lead to a firm risk-taking measure that would exhibit the elusive positive relationship with returns. Originality/value The literature review of this paper brought together and provided a succinct classification of the various explanations for Bowman’s paradox that allowed the identification of a potentially rich area of research. It identified a gap in the literature which is the formulation of suitable measures of firm risk-taking and made investigations in this area.

Risk Can Be Good: The Tradeoff Between Agency Conflicts, CEO Risk-Taking Incentives, and Credit Risk

2018 ◽  
Author(s):  
Kevin Koharki ◽  
Matthew C. Ringgenberg ◽  
Luke Watson
Keyword(s):  
Credit Risk ◽  
Risk Taking ◽  
Agency Conflicts

Credit Risk-Taking and Maturity Mismatch: The Role of the Yield Curve

2019 ◽  
Author(s):  
Giuseppe Ferrero ◽  
Andrea Nobili ◽  
Gabriele Sene
Keyword(s):  
Credit Risk ◽  
Risk Taking ◽  
Yield Curve ◽  
Maturity Mismatch

Financial and social efficiency analysis of Islamic microfinance institutions

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Marwa Fersi ◽  
Mouna Bougelbène
Keyword(s):  
Capital Structure ◽  
Credit Risk ◽  
Risk Taking ◽  
Negative Impact ◽  
Microfinance Institutions ◽  
Social Efficiency ◽  
Content Type ◽  
Islamic Microfinance ◽  
The Impact ◽  
The Relationship

PurposeThe purpose of this paper was to investigate the impact of credit risk-taking on financial and social efficiency and examine the relationship between credit risk, capital structure and efficiency in the context of Islamic microfinance institutions (MFIs) compared to their conventional counterparts.Design/methodology/approachThe stochastic frontier approach was used to estimate the financial and social efficiency scores, in a first step. In a second step, the impact of risk-taking on efficiency was evaluated. The authors also took into account the moderating role of capital structure in this effect using the fixed and random effects generalized least squares (GLS) with a first-order autoregressive disturbance. The used dataset covers 326 conventional MFIs and 57 Islamic MFIs in six different regions of the world over the period of 2005–2015.FindingsThe overall average efficiency scores are less than 50%, where CMFIs could have produced their outputs using 48% of their actual inputs. IMFIs record the lowest financial (cost) efficiency that is equal to 28% on average. The estimation results also reveal a negative impact of nonperforming loan on financial and social efficiency. Finally, the moderating effect of leverage funding on the relationship between credit risk-taking and financial efficiency was confirmed in CMFIs. However, leverage seems to moderate the effect of risk-taking behavior on social efficiency for IMFIs.Originality/valueThis paper makes an initial attempt to evaluate the effect of risk-taking decision and its implication on efficiency and MFIs' sustainability. Besides, it takes into consideration the role played by the mode of governance through the ownership structure. In addition, this research study sheds light on the importance of the financial support for the development and sustainability of these institutions, which in return, contributes to a sustainable economic development.

scholarly journals Relationship between Banks’ Capital and Credit Risk-Taking through Syndicated Loan

2015 ◽  
Vol 06 (12) ◽  
pp. 1297-1308
Author(s):  
Shu Ling Lin ◽  
Wei Peng Chen ◽  
Jun Lu
Keyword(s):  
Credit Risk ◽  
Risk Taking ◽  
Syndicated Loan

scholarly journals Empirics of Korean Shipping Companies’ Default Predictions

Risks ◽  
2021 ◽  
Vol 9 (9) ◽  
pp. 159
Author(s):  
Sunghwa Park ◽  
Hyunsok Kim ◽  
Janghan Kwon ◽  
Taeil Kim
Keyword(s):  
Logit Model ◽  
Prediction Models ◽  
Predictive Ability ◽  
Financial Ratios ◽  
Probability Of Default ◽  
Shipping Industry ◽  
Market Participants ◽  
Korean Economy ◽  
Default Prediction ◽  
Financial Characteristics

In this paper, we use a logit model to predict the probability of default for Korean shipping companies. We explore numerous financial ratios to find predictors of a shipping firm’s failure and construct four default prediction models. The results suggest that a model with industry specific indicators outperforms other models in predictive ability. This finding indicates that utilizing information about unique financial characteristics of the shipping industry may enhance the performance of default prediction models. Given the importance of the shipping industry in the Korean economy, this study can benefit both policymakers and market participants.

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