In this chapter we analyze the effects of credit contagion on the credit quality of a portfolio of bank loans issued to small- and medium-sized enterprises. To this aim we start from the discrete time model proposed in Barro and Basso (2005) that considers the counterparty risk generated by the business relations in a network of firms, and we modify it by introducing different rating classes in order to manage the case of firms with different credit qualities. The transition from one rating class to another occurs when a proxy for the asset value of the firm crosses some rating specific thresholds. We assume that the initial rating transition matrix of the system is known, and compute the thresholds using the probability distribution of the steady state of the model. A wide Monte Carlo simulation analysis is carried out in order to study the dynamic behavior of the model and, in particular, to analyze how the default contagion present in the model affects the output rating transition matrix of the portfolio.

A credit contagion model for the dynamics of the rating transitions in a small- and medium-sized enterprises bank loan portfolio

BASSO, Antonella;GUSSO, Riccardo
2008

Abstract

In this chapter we analyze the effects of credit contagion on the credit quality of a portfolio of bank loans issued to small- and medium-sized enterprises. To this aim we start from the discrete time model proposed in Barro and Basso (2005) that considers the counterparty risk generated by the business relations in a network of firms, and we modify it by introducing different rating classes in order to manage the case of firms with different credit qualities. The transition from one rating class to another occurs when a proxy for the asset value of the firm crosses some rating specific thresholds. We assume that the initial rating transition matrix of the system is known, and compute the thresholds using the probability distribution of the steady state of the model. A wide Monte Carlo simulation analysis is carried out in order to study the dynamic behavior of the model and, in particular, to analyze how the default contagion present in the model affects the output rating transition matrix of the portfolio.
The handbook of credit portfolio management
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10278/29990
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