A Structural Form Default Prediction Model for SMEs, Evidence from the Dutch Market

The objective of this research is to develop a structural form probability of default model for small and medium-sized enterprises, dealing with the methodological issues which arise in the modelling of small commercial loan portfolios, and to test the applicability of the model in practice. Other motivations are to provide an extensive overview of the characteristics of SMEs, and to provide a list of characteristics that a PD model for SMEs should contain, e.g. time and cost efficiency, broad applicability, limited data requirements, and powerful in predicting default. The structural form model is developed and tested on a unique dataset of private firm's bank loans of a Dutch bank. The results are promising; the model output differs significantly between defaulted and non-defaulted firms