Corporate and Personal Default Risk in the Long-Run: International Evidence

The importance of properly managing and quantifying corporate (and personal) default risk, and more generally credit risk cannot be understated as the great majority of the risk faced by banks and large financial institutions comes in the form of credit risk exposures. Understanding the determinants of bankruptcy rates over time and in the cross-section is of first-order importance for regulators and policy makers that are concerned about the well-functioning of the financial system, and economic growth. This research project is an extension to a companion project that makes use of the recently digitalized publications made available by the Swiss Official Gazette of Commerce to construct default rate indices based on all corporate and personal bankruptcies in Switzerland over the 130+ year period spanning 1883 to 2015. This Swiss dataset allows in-sample and truly out-of-sample tests on statistical models for the probability of default. Moreover, the complete coverage of the data makes it possible to construct disaggregated figures along several dimensions such as location, industry, leverage, and size. Thus, it enables us to contrast the drivers of bankruptcy rates for large companies versus SMEs versus individuals. The data is also particularly suited to study issues related to contagion and default correlations, and thus to measure the social cost of defaults. The scientific exchange with the Credit Risk Initiative at the National University of Singapore will enable us to deepen and enlarge the scientific contribution of the Swiss database along several dimensions. First, we can add a comparative international scope to the research on credit risk, thereby looking at insolvencies in different legal systems. Second, we can widen the research focus to personal bankruptcies as opposed to just corporate defaults. Third, we are able to also investigate resolutions of companies in difficulty as opposed to only legal insolvency procedures.