Loan characteristics and credit risk

Abstract

This paper is the sole responsibility of its authors and the views represented here do not necessarily reflect those of the Bank of Spain. The authors would like to express their thanks for the valuable comments received during the presentation made at the CEMFI lunch seminar, and the contributions made by Javier Delgado, Jorge Pérez, Daniel Pérez and Carlos Trucharte. The technical support given by Esther Llorente and Estrella Pulido was crucial to the successful completion of this work. Any errors that remain are, however, entirely the The aim of this paper is to study the impact that certain characteristics of loans (i.e. collateral, maturity, size, type of lender and closeness of the customer-bank relationship) have on default rates (PD). The results allow us to discern between the various theoretical approaches regarding the relationship between loan characteristics and credit risk and are generally in line with the scarce empirical evidence at international level. However, in some cases (particularly, savings banks) there are substantial differences that may have their origin in certain specific features of the Spanish financial system. This study uses information on the more than three million loans entered into by Spanish credit institutions over a complete business cycle (1988 to 2000) collected by the Bank of Spain’s Credit Register (Central de Información de Riesgos). In addition to its academic interest, the result of this study may be of use to banking supervisors interested in monitoring institutions ’ credit risk and banking regulators that wish to link capital requirements and provisions more closely to the risk actually incurred by institutions. 1

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