Default contagion among credit modalities: evidence from Brazilian data

Alexandre, Michel and Antônio Silva Brito, Giovani and Cotrim Martins, Theo (2017): Default contagion among credit modalities: evidence from Brazilian data.

Abstract

The aim of this paper is to assess the impact of the default of some personal credit modality in the future default of the other modalities. Using Brazilian microdata, we run a logistic regression to estimate the probability of default in a given credit modality, including among the explanatory variables the personal overdue exposure in the other credit modalities. Our results show that such effect is positive and significant, although quantitatively heterogeneous. We also discuss the rationale behind these results. Specifically, it was found that financing credit modalities (vehicle and real estate financing) contaminate more the other credit modalities, as their default may bring to the debtor the loss of the financed good. Moreover, riskier loan categories (overdraft, non-payroll-deducted personal credit and credit card) are more contaminated by the default of other modalities, what is explained by the fact that defaulted individuals have a limited access to less risky credit modalities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Credit default contagion; debtor approach; transaction approach
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

Basel Committee on Banking Supervision (BCBS) (2016). Prudential treatment of problem assets – definitions of non-performing exposures and forbearance. Issued for comments by July 15th, 2016.

Bellotti, T. and Crook, J. N. (2009). Credit Scoring with Macroeconomic Variables Using Survival Analysis. Journal of the Operational Research Society, 60 (12): 1699-1707.

Bellotti, T. and Crook, J. N. (2014). Retail Credit Stress Testing using a Discrete Hazard Model with Macroeconomic Factors. Journal of the Operational Research Society, 65 (3): 340-350.

Central Bank of Brazil (CBB) (2015). Press releases. Accessed in http://www.bcb.gov.br/en/#!/n/PRESS. December 2015.

Correa, A. S., Marins, J. T. M., Neves, M. B. E and Silva, A. C. M. (2014). Credit Default and Business Cycles: An Empirical Investigation of Brazilian Retail Loans. Brazilian Review of Economics, 68 (3): 337-362.

European Banking Authority (EBA) (2013). Consultation Paper on Draft Implementing Technical Standards on Supervisory reporting on forbearance and non-performing exposures under article 95 of the draft Capital Requirements Regulation. Issued for comments by March 26th, 2013.

Jarrow, R. A. and Turnbull, S. (2000). The Intersection of Market and Credit Risk. Journal of Banking and Finance, 24 (1-2): 271–299.

Leow, M. and Crook, J. N. (2016). The Stability of Survival Model Parameter Estimates for Predicting the Probability of Default: Empirical Evidence over the Credit Crisis. European Journal of Operational Research, 249 (2): 457-464.

Long, J. S. (1997). Regression Models for Categorical and Limited Dependent Variables. Thousand Oaks, CA: Sage.

Stepanova, M. and Thomas, L. C. (2002). Survival Analysis Methods for Personal Loan Data. Operations Research, 50 (2): 277-289.

Thomas, L.C., Edelman, D.B. and Crook, J.N. (2002). Credit Scoring and its Applications. SIAM Monographs on Mathematical Modeling and Computation. SIAM: Philadelphia, USA.

Tong, E. N. C., Mues, C. and Thomas, L. C. (2012). Mixture cure models in credit scoring: If and when borrowers default. European Journal of Operational Research, 218 (1): 132-139.