Fragility determinants of the private corporate sector in Colombia

Lemus-Esquivel, Juan Sebastián; Corredor, Adriana; Gutiérrez-Rueda, Javier

Fragility determinants of the private corporate sector in Colombia

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Temas de Estabilidad Financiera ; No. 66

Date published

2012-05-01

Date

2012-05

Authors

Lemus-Esquivel, Juan Sebastián
Corredor, Adriana
Gutiérrez-Rueda, Javier

Document language

eng

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Las opiniones contenidas en el presente documento son responsabilidad exclusiva de los autores y no comprometen al Banco de la República ni a su Junta Directiva.

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

Abstract

The aim of this paper is to identify a set of early warning indicators that effectively discriminate between firms that are more prone to default on their financial obligations from those that are less prone to do so. To fulfill this objective, we use the Discriminant Analysis methodology. We find that the strongest predictors that a Colombian real sector firm will fail to meet their financial obligations are: debt ratio and the number of banking relationships. We also use a Logit model to estimate the debtor’s probability of default (PD) and its distribution. The PD distribution has a positive skew and leptokurtic, suggesting a low overall PD. When performing a stress test (i.e. when a negative shock is applied to the firms’ performance), we find that the PD distribution shifts to the right causing an increase in loan loss provisions and a decrease in net profits.