Corporate Credit Risk Modeling and the Macroeconomy

by Kenneth Carling of the IFAU & Dalarna University,
Tor Jacobson of the Riksbank,
Jesper Lindé of the Riksbank, and
Kasper Roszbach of the Riksbank

April 5, 2006

Abstract: Despite a surge in the research efforts put into modelling credit risk during the past decade, few studies have incorporated the impact that macroeconomic conditions have on business defaults. In this paper, we estimate a duration model to explain the survival time to default for borrowers in the business loan portfolio of a major Swedish bank over the period 1994-2000. The model takes both firm-specific characteristics, such as accounting ratios and payment behaviour, loan-related information, and the prevailing macroeconomic conditions into account. The output gap, the yield curve and consumers' expectations of future economic development have significant explanatory power for the default risk of firms. We also compare our model with a frequently used model of firm default risk that conditions only on firm-specific information. The comparison shows that while the latter model can make a reasonably accurate ranking of firms' according to default risk, our model, by taking macro conditions into account, is also able to account for the absolute level of (default, and thus also credit) risk.

JEL Classification: C23, C24, C25, C41, E44, G21, G33, L25.

Keywords: Firm default, default risk, credit risk, corporate loans, duration model, survival, macroeconomy

Published in: Journal of Banking and Finance, Vol. 31, No. 3, (March 2007), pp. 845-868.

Previously titled: Capital Charges under Basel II: Corporate Credit Risk Modelling and the Macroeconomy

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