Is there any dependence between consumer credit line utilization and default probability on a term loan? Evidence from bank-level data

Anne-Sophie Bergerès, Philippe D'Astous () and Georges Dionne ()
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Anne-Sophie Bergerès: Caisse de dépôt et placement du Québec
Philippe D'Astous: HEC Montreal, Canada Research Chair in Risk Management

No 11-3, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: Whereas recent studies on revolving lines of credit suggest a positive relationship between exposure at default and default probability on the line, this paper considers the relationship between two financial instruments through the simultaneous analysis of credit line utilization and default probability on a personal loan. We model both financial instruments endogenously in a simultaneous equation system and find strong evidence of a positive relationship between the two instruments. Individuals in the default state use their credit line 59% more than those in the non-default state, and full utilization of the credit line increases the default probability on the loan by 46% when compared with non-utilization. Our results suggest that banks should manage both financial instruments simultaneously.

Keywords: Consumer finance; consumer risk management; credit line; term loan; default probability; ability to pay; endogeneity; simultaneous equations (search for similar items in EconPapers)
JEL-codes: D12 D14 G01 G21 G33 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2013-02-08
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Related works:
Working Paper: Is there Any Dependence Between Consumer Credit Line Utilization and Default Probability on a Term Loan? Evidence from Bank-Level Data (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2011_003

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