Credit Risk Measurement Research Articles

The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime

The study investigates how monetary policy affects bank risk-taking under a multiple-tool regime of Vietnam during 2007–2018. Particularly, we also consider the conditioning role of bank performance, broken down by bank profitability and cost efficiency, in this nexus. Using both dynamic and static panel models, we show that the liquidity injection initiated by the central bank’s asset purchases induces banks to take more risks, captured by the traditional Z-score and two alternative measures of credit risk. However, monetary policy easing through decreased interest rates is beneficial to the credit portfolio and financial stability of banks, which therefore challenges the functioning of the bank risk-taking channel. This startling result is robust across three different interest rate measures, including lending rates, refinance rates and rediscount rates. Further analysis reveals that our observed effects are alleviated for banks with higher performance — i.e., more profitable and efficient banks. This in-depth finding offers more insights into the “search for yield” incentive, based on the theory of information asymmetry and the two competing hypotheses of “bad management” and “cost skimping”.

Random LGD adjustments in the Vasicek credit risk model

This paper proposes an approximate formula to measure the credit risk of portfolios under random recoveries. This formula is based on a Taylor expansion and enables having recoveries that are correlated with the default rates over the business cycle. We show how to calibrate the corresponding models and the accuracy of the approximation using defaulted corporate bonds data for the period 1982–2014. Our results show that the proposed formula can be used to approximate the loss distribution of a portfolio under random correlated recoveries in a very satisfactory way. Moreover, this kind of recovery models could be easily implemented under the Basel capital requirements regulation to improve the credit risk measurement.

Determinants of Credit Risk in the Banking Sector of Ghana: A Panel Co-integration Approach

The economic development of any nation hinges on the health of its financial system. In recent years, the health of the Ghanaian Banking sector has been affected severely as a result of high levels of non-performing loans (NPLs), which has been identified as a major threat to the overall profitability and survival of banks. To minimize the impact of NPLs on the financial sector, key stakeholders such as the government, bank officials and regulators are working hard in that regard. However, any policy response aimed at dealing with the high rate of non-performing loans first requires the understanding of the underlying determinants of NPLs. Against this backdrop, this paper apply panel co-integration techniques to investigate the determinants of credit risk (NPLs) in the banking sector of Ghana. We use NPL as a proxy to measure credit risk and assess how it is influenced by macroeconomic and bank-specific factors. A balanced panel data of 16 universal banks in Ghana from 2010 to 2016 has been analyzed using Panel co-integration techniques such as Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS). Our result shows that growth in the economy, measured by Gross Domestic Product (GDP) has significant influence on the NPLs of banks in the long-run. The results further revealed that capital adequacy, profitability and liquidity of banks are significant predictors of NPLs. However, our results suggest that bank size, inflation and interest rate have statistically insignificant influence on the NPLs of Ghanaian banks. The study recommend, among others, that whereas it is important for government and policymakers to work to improve macroeconomic outcomes, banks should also improve their capital adequacy, profitability, and efficiency position as these bank-specific interventions could significantly improve credit quality and minimize NPLs.

Impact of Credit Risk on Momentum and Contrarian Strategies: Evidence from South Asian Markets

We examine the profitability of the momentum and contrarian strategies in three South Asian markets, i.e., Bangladesh, India, and Pakistan. We also analyze, whether credit risk influences momentum and contrarian return for these markets from 2008 to 2014. We use default risk that relates to non-payments of debts by firms as a measure of credit risk. For that purpose, we use distance to default (DD) by Kealhofer, McQuown, and Vasicek (KMV) model as a proxy of credit risk. We calculate the credit risk and form the momentum and contrarian strategies of the firms based on high, medium, and low risk. We find that in all three markets, the momentum and contrarian returns are significant for medium and high credit risk portfolios and no momentum and contrarian returns for low credit risk portfolios.

Analysis of the environmental trend of network finance and its influence on traditional commercial banks

In order to understand the environmental trend of network finance and the impact of network finance on traditional ommercial banks, after analyzing the transaction risks of network finance, this study learns from the advanced models of credit risk measurement and early warning at home and abroad and the latest artificial intelligence technology, combining them with China’s national conditions, so as to establish a credit risk measurement system suitable for commercial banks. In this study, the research is carried out from the perspectives of theory and practice, technology and business, and the credit risk warning system, measurement model and implementation tools are comprehensively sorted out, then the basic theories and core ideas are studied. In accordance with the concept of big data mining, this study proposes a financial crisis early warning model based on artificial intelligence system. Based on the empirical analysis of the main causes of the rapid decline in the asset quality of China’s joint-stock​ commercial banks, and based on the characteristics of big data mining in the information explosion era, it is pointed out that the artificial intelligence is a powerful tool to improve the ability of credit risk measurement. It can be confirmed that the development of network finance has brought different impacts on the business, business model, and business philosophy of banks.

Determinants of Credit Risk in Commercial Banks of Kosovo

Purpose: The purpose of this paper is to analyze some of the determinants of credit risk in commercial banks in Kosovo through the use of regression analysis for a dataset covering a time series of 7 years (2012 - 2018). Design/Methodology/Approach: The data have been collected from publications of Central Bank of Kosovo and from Kosovo Agency of Statistics The data have been analyzed on quarterly basis. In order to conduct the empirical part of the study that gives us the answer to the relationship between credit risk and the determinants of this risk, we analyzed 6 variables in the study. To perform the necessary analysis we have used the statistical software SPSS 23. Through the regression analysis, the main findings and results of the study were generated. Findings: After analyzing the necessary data, the paper concludes that, among credit risk determinants, interest rates on loans and profitability of banks (ROA) have the largest and most significant impact on credit risk, namely non-performing loans as the credit risk measure. Practical implications: For researchers and academics, the study provides a useful basis on which further studies on credit risk and the factors that cause this risk can be conducted. Originality/Value: The research paper is based on recent studies that assess credit risk in other countries and use reliable data on the banking sector in Kosovo.

Riesgo de crédito y morosidad, en la cooperativa de ahorro y crédito Qorilazo

El estudio empírico determina la relación existente entre el riesgo de crédito y la morosidad, en la cooperativa de ahorro y crédito Qorilazo, bajo el desarrollo de un enfoque cuantitativo con un diseño no experimental-transaccional a fin de determinar si las variables están relacionadas mediante un patrón predecible. Para la obtención de resultados se consideró el total de la población, conformada por 35 asesores de otorgamiento de créditos; utilizándose como técnicas, tanto la encuesta para determinar la medición del riesgo de crédito que evalúan los asesores antes del otorgamiento de créditos, como la sistematización de información para la determinación de los índices de morosidad de los créditos otorgados por los 35 asesores. Los resultados muestran que el riesgo de incumplimiento obtuvo un valor promedio de 3.09, el cual de acuerdo a la baremación alcanza un nivel regular, así mismo el riesgo de exposición, alcanzó un nivel de riesgo alto (promedio=2.46); finalmente, la medición de riesgo de recuperación se encontró en un nivel muy bajo (promedio=4.66). En consecuencia, la evaluación de riesgo de crédito en la entidad de estudio está en un nivel regular; asimismo, el índice de morosidad acumulado fue de 7%, encontrándose en el límite del margen aceptable pero alto en relación a lo esperado; de allí que existe relación significativa directa y alta entre el riesgo de crédito y la morosidad con un nivel de confianza del 95% (r = 0.92).

Higher Education Expansion and Credit Risk: Evidence from China Universities Panel Data

ABSTRACT This study aimed to examine the relationship between two constructs: scale and credit risk of the higher educational institutions. A regression analysis was conducted for panel data from 2015 to 2019 with fixed/random effects. The outcomes showed that scale had a significantly negative relationship with both credit risk measures, indicating that the rapid expansion of a university will decrease its ability to repay the debt and efficiently operate. In other words, credit risk greatly arises while a higher education institution (HEI) is expanding rapidly. The findings illustrated that HEIs in China were actually suffering diseconomies of scale and expanding too fast to increase the quality and efficiency.

The unintended consequences of regulatory import: the Basel Accord’s failure during the financial crisis

ABSTRACT This article examines to what extent regulatory import (RI), a common, but understudied mode of governance in regime complexes, was a separate factor of the global financial crisis in 2008. RI describes a specific mode of governance that occurs when regulators explicitly incorporate functionally important governance from an external forum to their own regulations, thus making their own performance dependent on external agency. While RI is associated with benefits, such as specialisation, it could cause unintended consequences. The one-sided dependence on external authority could result in the import of non-complementary governance or regulatory failures and undermine the regulator’s performance. We illustrate our argument with the Basel Committee on Banking Supervision that imported governance authority from the International Accounting Standards Board and credit rating agencies. The paper finds two negative consequences of RI for the Basel Committee’s regulatory performance in the 2008 financial crisis. First, uncoordinated changes of accounting rules increased pro-cyclical effects that exacerbated the banking crisis. Second, import of credit risk measurement from credit rating agencies led to misjudgement of risk exposure.

A better criterion for forced selling in bond markets: Credit ratings versus credit spreads

During the global financial crisis, a bond portfolio manager using only credit ratings suffered from significant losses due to their lagging properties, and now focuses on market-based criteria as another credit risk measure for forced selling. In this study, we verify whether a market-based criterion outperforms in running the forced selling strategy for bond portfolios. In contrast to the market expectation, our empirical results show that the forced selling strategy with only market measures is inferior to the rating-based strategy in terms of risk-adjusted returns, although market measures precede changes in bond ratings. This result stems from the high volatility of market-based credit measures, which results in too frequent or too early sale of a bond with credit deterioration. The improvement of risk-return trade-off observed only when market measures are jointly considered with bond ratings. This implies that market-based credit measures have complementary benefits for detecting credit risk changes. In addition, these results are robust, even for credit-stressed bond portfolios, and for credit-stressed market conditions.

Interaction Between CDS Premiums and Stock Markets: Case of Turkey

The relationship between CDS premiums and stock market is investigated in this study by using data of Turkey. Here CDS premiums, which constitute an alternative to credit ratings of countries, are used as a measure of sovereign credit risk. At the end of the examination a long-term relationship is found between variables. Nonetheless causality relationship cannot be detected between variables. Long run relationship that is detected could be associated with both foreign and domestic investors who perceive CDS premiums as a barometer of sovereign credit risk and make investment decisions by considering factors including sovereign credit risk.

Credit risk – Return puzzle: Evidence from India

Although asset pricing theories predict a positive relation between risk and returns, empirical findings on credit risk-return relationship are mixed. And, observed negative relation between the two in this regard is referred to as credit risk-return puzzle. Using credit rating as a measure of credit risk, we have investigated into the existence of this puzzle in India during July 2011 to March 2019. We have used information for the companies listed on the National Stock Exchange for this purpose. Our results validate the presence of this puzzle in the Indian stock market. Moreover, credit risk is observed to be a systematic risk, which has not been captured in the traditional asset pricing models. We have also observed partial evidence favoring both behavioural and rational pricing explanations—the two widely acknowledged explanations in the literature behind this puzzle. On our further query in this connection, we have not seen any significant change in the puzzle due to the recent enactment of the Insolvency and Bankruptcy Code.

An International Comparison on Excessive Credit Expansion, Credit Guarantee Programs and The Risks Arising

Crediting in the banking sector plays an important role in all developed and developing countries. For this reason, it is monitored continuously by public authorities and measures are taken to control credit supply in economic growth periods. On the other hand, in an economic slowdown, when banks are reluctant to increase their credit portfolio, public credit guarantee programs are put into use to increase the credit supply. In this study, a sample covering 26 advanced and emerging economies was analyzed, and the effects of credit gap, credit guarantees and economic growth on credits and arising credit risks were investigated. The findings show that both credits and non-performing loans, an important measure of credit risk, are affected by credit gap, credit guarantees, and economic growth. On the one hand, public credit guarantees positively affect economic growth. On the other hand, though they are widely used for supporting small and medium-sized enterprises, our findings suggest that such expansive credit policies might negatively affect the riskiness of the credit portfolios and soundness of the banking sector.

Оценка функциональной взаимосвязи между спредом доходности и спредом дефолта

The paper examines one of the conceptual issues of financial management – the question of the optimal ratio of the magnitude of the risk and the volume of profitability covering this risk. A parametric relationship is proposed and statistically confirmed between the yield spread of corporate bonds that have a greater credit risk than risk-free instruments and the default spread characterizing the measure of credit risk. The research topic is becoming particularly relevant for the Russian market at the moment, because as a result of the dynamic development in recent years of both the corporate bond market and the rating industry in Russia, has become available database of assigned ratings, historical data on the frequency of defaults of issuers and recovery rates RR, sufficient for conducting research. This made it possible to generate some statistics on the Russian market and to link the issuer rating level with the probability of default of PD, to give a quantitative risk assessment using one of the models of the Basel Recommendations. In the empirical part of the work, the maximum spread Gmax for this market is calculated, over which the investor risks more than covers the profitability spread. The optimal risk / return ratio is determined at the point of efficiency coefficient maximum Kef.

The Validation of Statistical Credit Risk Measurement by Using Business Bank Account Activity Data—An Empirical Analysis through Machine Learning—

The Validation of Statistical Credit Risk Measurement by Using Business Bank Account Activity Data—An Empirical Analysis through Machine Learning—

Merenje rizika pozajmljivanja malim i srednjim preduzećima u Republici Srbiji u svetlu savremenih bankarskih regulativa

The subject matter of this paper is measuring the risk of lending to Small and Medium-sized Enterprises (SMEs) from the point of view of the existing banking regulations. The paper starts from the hypothesis that an increase in the transparency of the credit risk measurement process would enable the timely detection of problems and leave room for the actions necessary for the management of small and mediumsized enterprises, as well as all creditors, and generate an opportunity for SMEs to provide more favorable sources of financing. In the research study, the well-known Altman Z-Score model was used to assess the probability of default and rank a company. The results of the application of the Z-Score model indicate that, to a certain extent, they can detect the companies in which bankruptcy may occur in the two years following the assessment, on the one hand, but they cannot be considered as reliable for the assessment of the probability of the bankruptcy of SMEs in the Republic of Serbia, on the other.

Credit risk measurement: Evidence of concentration risk in Polish banks’ credit exposures

In recent years, there has been a lot of scientific research stressing the importance of understanding and measuring concentration risk in credit portfolios. The article presents credit risk measurement within the capital requirements regulation of the corporate sector. Main objective is to assess the financial stability of the banking sector from a credit risk perspective. The empirical analysis was based on the individual data from different sources (covering the period 2007 -2018), which are as follows: prudential reporting, business register, financial and behavioural data and balance of payments. This paper analyses the exposure of Polish banks to credit risk arising from different economic sectors. The evaluation includes the firm-level probabilities of default, loss given default, expected losses and unexpected losses. The measures of expected and unexpected losses were estimated by using a structural multi-risk factor approach. While conducting the research, it has been noticed that a credit risk differs across various industries as well as at different phases of economic cycle. Furthermore, the research results indicate that both from the standpoint of individual banks and prudential authorities the correlation risk is being underestimated.

A Quantitative Analysis of Risk Premia in the Corporate Bond Market

Measures of corporate credit risk incorporate compensation for unpredictable future changes in the credit environment and compensation for expected default losses. Since the launch of purchases of government securities and corporate securities by the European Central Bank, it has been discussed whether the observed reduction in corporate credit risk was due to the decrease in risk aversion favored by the monetary easing or by expectations of lower losses due to corporate defaults. This work introduces a new methodology to break down the factors that drive corporate credit risk, namely the premium linked to cyclical and monetary conditions and that linked to the restructuring of the companies. Untangling these two components makes it possible to quantify the drivers of excess returns in the corporate bond market.

Sovereign Risk after Sovereign Restructuring. Private and Official Defaults

This paper studies the relationship between sovereign debt default and sovereign credit risk by taking into account the depth of a debt restructuring and by distinguishing between commercial and official debt. We take different proxies for credit risk measures, such as rating agencies and institutional investors’ratings as well as bond yield spreads (EMBIG). By controlling for both the occurrence and the magnitude of debt defaults, we  nd that commercial and official defaults are associated to different outcomes. Private defaults seem to involve some reputational costs up to seven years since the last agreement, while official defaulters are not affected (or may even benefit) by the restructuring episodes. Using the Synthetic Control Method, we fi nd further evidence for the heterogeneity of the economic impact of debt restructurings, confi rming that official and private defaults may have different costs and then induce selective defaults.

CREDIT RISK AND BANK PROFITABILITY OF COMMERCIAL BANKS IN GHANA

This study attempted to explore the connection between credit risk management and the profitability of the Ghana Stock Exchange (GSE) listed commercial banks. The study specifically sought to examine the relationship between credit risk and the profitability of the firms as measured by ROA. The study adopted these variables to measure credit risk (non-performing loan ratio, cost per loan asset, capital reserved 0.1ratio and asset growth ratio) and return on asset (ROA) as a profitability estimator. Following some diagnostic and specification studies to address the fundamental assumptions of the Classical Linear Regression Model (CLRM). The study uncovered that NPLR had a significantly negative effect on the firms’ profitability as measured by ROA [β=-0.1671, (p=0.1360)>0.05]. Also, the cost per loan asset (CPLA) had a positive influence on the firms’ profitability as measured by ROA [β= 0.0249, (p=0.8252)>0.05]. For the other variables of credit risk measurements, capital reserved ratio, and assets growth ratio. The capital reserve ratio had a significant positive association with ROA [β=0.2867, (p=0.0095) <0.05. Similarly, asset growth ratio had a statistically significant negative connection with firm’s profitability measured by ROA [β=-0.3835, (p=0.0004) <0.05. Based on the results, the study suggested that since credit risk had a negative association with the firm’s profitability, the companies should adopt efficient credit risk management methods to assist guide their profitability. This point is raised because, as demonstrated by the results of the study, an increase in credit risk led to a decrease in the profitability of the companies. KEYWORDS: Credit risk, Commercial banks, Loans, Profitability, Ghana Stock Exchange.