This paper uses a probit model on a unique dataset including 13,081 Italian firms and 111 co-operative banks involved in the lending process to provide empirical evidence suggesting that the use and violations of credit lines and long-term loans overruns predict the 1-year and 2-year probability of default (PD), controlling for balance sheets indicators and time varying bank characteristics, captured by bank-time fixed effects. In addition, when combined with accounting data, credit-related indicators obtained from private internal banking sources improve the SMEs’ default prediction. The marginal benefit of the bank-firm specific information is also assessed by comparing the default prediction accuracy of a model that incorporates the accounting information with that of a full model, including also private information. In terms of heterogeneity, our results reveal that the association between the balance sheet indicators and data on bank-firm relationships and the default probability can vary across sectors and geographies, highlighting the importance for banks of specific analysis to better assess risk at the firm level.

Predicting SMEs’ default risk: evidence from bank-firm relationship data

Modina M.;Gallucci C.;
2023-01-01

Abstract

This paper uses a probit model on a unique dataset including 13,081 Italian firms and 111 co-operative banks involved in the lending process to provide empirical evidence suggesting that the use and violations of credit lines and long-term loans overruns predict the 1-year and 2-year probability of default (PD), controlling for balance sheets indicators and time varying bank characteristics, captured by bank-time fixed effects. In addition, when combined with accounting data, credit-related indicators obtained from private internal banking sources improve the SMEs’ default prediction. The marginal benefit of the bank-firm specific information is also assessed by comparing the default prediction accuracy of a model that incorporates the accounting information with that of a full model, including also private information. In terms of heterogeneity, our results reveal that the association between the balance sheet indicators and data on bank-firm relationships and the default probability can vary across sectors and geographies, highlighting the importance for banks of specific analysis to better assess risk at the firm level.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11386/4825233
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