by Thais Lærkholm Jensena, David Landob and Mamdouh Medhatc
The Basel II/III and CRD IV Accords reduce capital charges on bank loans to smaller firms by assuming that the default probabilities of smaller firms are less sensitive to macroeconomic cycles. We test this assumption in a default intensity framework using a large sample of bank loans to private Danish firms. We find that controlling only for size, the default probabilities of small firms are, in fact, less cyclical than the default probabilities of large firms. However, accounting for firm characteristics other than size, we find that the default probabilities of small firms are equally cyclical or even more cyclical than the default probabilities of large firms. These results hold using a multiplicative Cox model as well as an additive Aalen model with time-varying coefficients.
JEL Codes: G21, G28, G33, C41.
Full article (PDF, 49 pages, 1720 kb)
a University of Copenhagen and Danmarks Nationalbank
b Copenhagen Business School
c Cass Business School - City, University of London