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Non-Performing Loans for Italian Companies: When Time Matters. An Empirical Research on Estimating Probability to Default and Loss Given Default

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  • Giuseppe Orlando

    (Department of Economics and Finance, University of Bari “Aldo Moro”, Via C. Rosalba 53, 70124 Bari, Italy
    Department of Applied Mathematics, Universidad de Jaén, Campus Las Lagunillas, Avda. Antonio Pascual Acosta, 23071 Jaén, Spain)

  • Roberta Pelosi

    (Department of Economics and Finance, University of Bari “Aldo Moro”, Via C. Rosalba 53, 70124 Bari, Italy)

Abstract

Within bank activities, which is normally defined as the joint exercise of savings collection and credit supply, risk-taking is natural, as in many human activities. Among risks related to credit intermediation, credit risk assumes particular importance. It is most simply defined as the potential that a bank borrower or counterparty fails to fulfil correctly at maturity the pecuniary obligations assumed as principal and interest. Whenever this happens, a loan is non-performing. Among the main risk components, the Probability of Default (PD) and the Loss Given Default (LGD) have been the subject of greater interest for research. In this paper, logit model is used to predict both components. Financial ratios are used to estimate the PD. Time of recovery and presence of collateral are used as covariates of the LGD. Here, we confirm that the main driver of economic losses is the bureaucratically encumbered recovery system and the related legal environment. The long time required by Italian bureaucratic procedures, simply put, seems to lower dramatically the chance of recovery from defaulting counterparties.

Suggested Citation

  • Giuseppe Orlando & Roberta Pelosi, 2020. "Non-Performing Loans for Italian Companies: When Time Matters. An Empirical Research on Estimating Probability to Default and Loss Given Default," IJFS, MDPI, vol. 8(4), pages 1-22, November.
    • Handle: RePEc:gam:jijfss:v:8:y:2020:i:4:p:68-:d:441882
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