Abstract
In the current credit-risk system, a company"s credit quality can be evaluated by a credit rating, but this does not determine its credit quantity. We define a firm"s credit quantity as the firm"s credit limit that can be provided to the firm based on the value of the firm"s assets. Our purpose in this paper is to prevent an abnormal increase in credit exposure by managing a firm"s total loan amount (TLA) within the credit limit granted based on the firm"s asset value. We propose a one-factor asset model instead of the Merton"s asset model and estimate the credit limit corresponding to the firm"s credit rating from the one-factor asset model. We also developed a credit limit system with five credit limit grades based on estimates of credit limits to effectively apply credit limit policies to risk management. We show that reasonable credit limit management can substantially reduce the losses of financial institutions through empirical results.
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