Is there any dependence between consumer credit line utilization and default probability on a term loan? Evidence from bank-customer data |
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| Institution: | 1. Caisse de dépôt et placement du Québec, Canada;2. Georgia State University, Department of Risk Management and Insurance, United States;3. HEC Montréal, Department of Finance, Canada Research Chair in Risk Management, Canada;1. Department of Mathematics, Southeast University, Nanjing 210096, PR China;2. School of Mathematical Sciences, Kaili University, Kaili 556011, PR China;1. School of Business and Economics, Humboldt-University of Berlin, Unter den Linden 6, 10099 Berlin, Germany;2. Department of Decision Sciences & Information Management, Catholic University of Leuven, Naamsestraat 69, B-3000 Leuven, Belgium;3. School of Management, University of Southampton, Highfield, Southampton SO17 1BJ, United Kingdom;4. Nottingham University Business School, University of Nottingham-Malaysia Campus, Jalan Broga, 43500 Semenyih, Selangor Darul Ehsan, Malaysia;1. Warrington College of Business, PO Box 117168, Gainesville, FL 32611-7168, United States;2. Stillman School of Business, 400 South Orange Ave, South Orange, NJ 07079, United States;3. Department of Finance, Insurance, and Real Estate, Warrington College of Business, PO Box 117168, Gainesville, FL 32611-7168, United States |
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| Abstract: | We study the relationship between two financial instruments through the simultaneous analysis of personal credit line utilization and default probability on a personal term loan. We model both dependent variables in a system of simultaneous equations and find strong evidence of dependence between the two financial instruments. Individuals in the default state draw their credit line by 9 percentage points more and, depending on the specification, a 10 percentage point increase in credit line utilization decreases the default probability by 0.09 to 0.41 percentage points, on a base default rate of 1.08%. This provides evidence that borrowers may use the liquidity of the credit line to pay down the term loan in periods of financial distress and suggests that banks should manage both financial instruments simultaneously. |
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