A model of credit risk in the corporate sector based on bankruptcy prediction
- Ida Nervik Hjelseth and Arvid Raknerud
- Staff Memo
We propose a method for assessing the risk of losses on bank lending to the non-financial corporate sector based on bankruptcy probability modelling. We estimate bankruptcy models for different industries and attach a risk weight to each firm's debt in a given year. The risk weight is equal to the probability of bankruptcy. By summing all risk-weighted debt in an industry, we obtain an estimate of the share of debt in bankruptcy accounts in a given year. A key feature of our model is the inclusion of economic indicators at the industry level, observed in real time, as explanatory variables together with standard financial accounting variables and real-time credit rating information. We find that historically, during 2000-2014, there is good correspondence between our estimated measure of risk-weighted debt and actual debt in bankruptcy accounts. Moreover, bank losses according to bank statistics and debt in bankruptcy accounts display a similar pattern over time in most industries.
Staff Memos present reports and documentation written by staff members and affiliates of Norges Bank, the central bank of Norway. Views and conclusions expressed in Staff Memos should not be taken to represent the views of Norges Bank.
ISSN 1504-2596 (online)