MODELING CREDIT RISK FOR SMEs: EVIDENCE FROM THE US MARKET

Edward Altman and Gabriele Sabato
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Gabriele Sabato: Ulster Bank, Ireland

Chapter 9 in Managing and Measuring Risk:Emerging Global Standards and Regulations After the Financial Crisis, 2013, pp 251-279 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractConsidering the fundamental role played by small and medium sized enterprises (SMEs) in the economy of many countries and the considerable attention placed on SMEs in the new Basel Capital Accord, we develop a distress prediction model specifically for the SME sector and to analyze its effectiveness compared to a generic corporate model. The behavior of financial measures for SMEs is analyzed and the most significant variables in predicting the entities' credit worthiness are selected in order to construct a default prediction model. Using a logit regression technique on a panel of over 2,000 US firms (with sales less than $65 million) over the period 1994–2002, we develop a one-year default prediction model. This model has an out of sample prediction power which is almost 30 percent higher than a generic corporate model. An associated objective is to observe our model's ability to lower bank capital requirements considering the new Basel Capital Accord's rules for SMEs.

Keywords: Risk Management; Sovereign Risk; Systemic Risk; Liquidity; Credit Risk; Equity Risk Premium; Enterprise Risk Management (search for similar items in EconPapers)
Date: 2013
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Related works:
Journal Article: Modelling Credit Risk for SMEs: Evidence from the U.S. Market (2007)
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