Salazar, Christian, P. FM: 09201 Go, Kevin Ryan, L. Mr. Meynard Bathan

Salazar, Christian, P.
FM: 09201
Go, Kevin Ryan, L.
Mr. Meynard Bathan
Abstract:
The Bank analyzed the impact that certain characteristics of loans have on credit risk.
They focused on collateral, type of lender institution and the relationship between the
bank and the company it is financing, trying to discern among the various conflicting
hyphotheses that explain the impact of such variables on the probability of default of a
loan.
Unlike many of the existing empirical literature, they use a huge dataset from the
Spanish Credit Register (Central de Informacion de Riesgos or CIR), owned and
managed by Banco de Espaa, the Spanish regulation and supervision authority. We
focus on a loan by loan basis, analysing more than three million loans made during the
entire economic cycle (from 1988 till 2000). They focus on ex post credit risk (i.e. if the
loan has defaulted or not) which allows for a direct test of the relationship between the
explanatory variables and credit risk. Many of the previous literature has focus on risk
premiums. Finally, it is not important to point out that the vast majority of the empirical
literature on these issues has focused on the US loan market. The use of the CIR might
contribute to enrich the analysis. They have applied a logit model to the pool of data,
focusing on loans to companies above a threshold of twenty four thousand euros.
Given the size of the database, the estimation of the parameters id highly efficient. They
have tried to discern whether collateral is pledgedby low risk borowers, as one strand
of the theoretical literature argues: if the lender does not know the quality of the
borrower, it can use the collateral as a device to sort borrowers quality. Collateral
increase the ex post probability of default of a loan. Secondly, they have found
significant differences among the credit risk taken by various lenders.
Objectives:
To determine the probability of default (PD) of the bank loans. They focus the
discussion on a limited set of determinants (collateral, type of lender and bankborrower relationship) while controlling for the other explanatory variables such as the
macroeconomics environment, characteristics of the borrower (industry and region) and
of the loan (instrument, currency, maturity and size).
Methodology:
The bank try to discern if the riskier borrowers are those who have collateralised loans.
Banks managed by conservative managers (may be those of savings banks) might be
less prone to take on credit risk than those where shareholders have more control over
bank risk- taking decisions.
Findings:
The main contributions of the papers are based on the large dataset on loan operations
for which data on ex ppost risk are available. The study uses information on the more
than three million loans entered into by Spanish credit institutions over a complete
business cycle collected by the Bank of Spains Credit Register.
Several papers have found that the ownershipof the banks affects their risk taking
behaviour and credit policies. As well as being problematic , aggregation of loan
charateristics of a single borrower might distort the conclusions. All in all, this leads us
to view that it is necessary to determine the influence of these variables at the level of
the individual loan in order to obtain a point of reference for any subsequent aggregate
analysis undertaken.
Conclusion:
The impact of collateral on credit risk is a subject that has raised a good deal of debate.
From a theoretical perspective, there are two alternative interpretations that lead to
different empirical predictions. Lower risk borrowers are willing to pledge more and
better collateral, given taht their lower risk means they are less likely to lose it. Thus,
collateral acts as a signal enabling the bank to mitigate or eliminate the adverse
selection problem caused by the exisnece of iformation asymmetries between the bank
and the borrower at the time of the loan decison.

Salazar, Christian, P. FM: 09201 Go, Kevin Ryan, L. Mr. Meynard Bathan

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Salazar, Christian, P. FM: 09201 Go, Kevin Ryan, L. Mr. Meynard Bathan

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Salazar, Christian, P.

Go, Kevin Ryan, L.

Mr. Meynard Bathan

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