my•research
•FInance•
tapas
Credit risk characteristics of US small business portfolios (with D. Bams and Ch. Wolff)
This paper addresses issues related to industry heterogeneity, default clustering and parameter uncertainty of capital requirements in US retail loan portfolios. Using a multi-factor model of credit risk, we show that the Basel II capital requirements overstate the riskiness of small businesses. Retail exposures are a much safer investment than the regulator would suggest. We find that sensitivity to the common risk factors is low and that small business risk is predominantly a reflection of idiosyncratic risk. Our results show that only 0.00-3.39% of the asset variability is explained by economy-wide risk factors. The remaining 96.61%-100.00% of small business risk is due to changes in the firm-specific characteristics. Moreover, both expected and unexpected losses are time dependent. Their shifts over the course of financial crisis cause uncertainty in the provisions level and capital requirements. Importantly, our estimates of asset correlations are significantly lower than any available estimates for corporate firms. Our results are based on a new, representative dataset of US retail businesses from 2005 to 2011 and give fundamental insights into the US economy.
Ripple effects from industry defaults (with D. Bams and Ch. Wolff)
This paper studies early default risk spillovers to small businesses. In this paper we show that default rates among small businesses are significantly higher in the presence of a default on S&P rated debt in an industry which buys their products or in the same industry. Using a new data set on S&P rated debt defaults, small businesses defaults, production process linkages and industry characteristics, we find evidence of negative wealth effects transmitted to small businesses along the production process. Also, such a ripple effect is mitigated in loan portfolios concentrated into large and highly interconnected industries. We observe that a large number of firms in an industry serves a cushion to default risk transmission just like the wide economic ties offer some benefits of diversification.
Trade credit: Elusive insurance of firm growth (with D. Bams and J. Bos)
Firms depend heavily on trade credit. In 2004 the manufacturing, transportation, retail and wholesale trade purchased about 18% of all inputs with a delayed payment. This paper argues that trade credit linkages are an elusive insurance: as long as a firm is financially unconstrained and times are good, more trade credit enhances sales stability and insures against shocks to firm's suppliers. However, if firm becomes financially contained, runs short of liquid assets or when times are bad, trade credit's stabilizing abilities come to an end and trade credit itself can serve as mechanism propagating supplier shocks onto its customers.
We provide evidence that, in general, trade credit plays a significant role in the growth stability of customers by reducing the propagation of firm-level shocks from suppliers onto their customers. On average, customer experiences about 20% lower disruption to its sales from a shock to its supplier if trade credit linkages exist next to production linkages. However, the insurance effect does not accompany trade credit linkage during bad times, for financially constrained or cash poor firms.
