Is There Any Dependence between Consumer Credit Line Utilization and Default Probability on a Term Loan? Evidence from Bank-Level Data

43 Pages Posted: 10 Jul 2011 Last revised: 5 Jan 2023

See all articles by Anne-Sophie Bergerès

Anne-Sophie Bergerès

Caisse de dépôt et placement du Québec

Philippe d'Astous

HEC Montreal - Department of Finance

Georges Dionne

HEC Montreal - Department of Finance

Date Written: February 8, 2013

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

JEL Classification: D12, D14, G01, G21, G33

Suggested Citation

Bergeres, Anne-Sophie and d'Astous, Philippe F. and Dionne, Georges, Is There Any Dependence between Consumer Credit Line Utilization and Default Probability on a Term Loan? Evidence from Bank-Level Data (February 8, 2013). Journal of Empirical Finance, Vol. 33, No. 1, 2015, Available at SSRN: https://ssrn.com/abstract=1880940 or http://dx.doi.org/10.2139/ssrn.1880940

Anne-Sophie Bergeres

Caisse de dépôt et placement du Québec ( email )

Quebec
Canada

Philippe F. D'Astous

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)

HOME PAGE: http://www.hec.ca/gestiondesrisques/

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