Project Description


This paper uses a probit model on a unique dataset of 13,081 Italian firms and 111 co-operative banks
involved in the lending process to provide empirical evidence suggesting that the use and violations of
credit lines and long-term loan overruns predict one-year and two-year probability of default (PD). The
analysis controls for balance sheet indicators and time varying bank characteristics, captured by bank-
time fixed effects. When combined with accounting data, credit-related indicators obtained from private
internal banking sources improve small and medium-sized enterprises’ (SMEs) default prediction. The
marginal benefit of the bank-firm specific information is also assessed by comparing the default
prediction accuracy of a model that incorporates accounting information with that of a full model
including private information. In terms of heterogeneity, the association between the balance sheet
indicators and data on bank-firm relationships and default probability can vary across sectors and
geographies. This highlights the importance for banks of specific analysis to better assess risk at the
firm level.