Credit risk of non-financial companies in the context of financial stability

The aim of this paper is: (i) to examine the determinants of default on bank loans for Romanian non-financial companies, (ii) to evaluate risks to financial stability stemming from the real sector – via the direct channel and (iii) to provide with a stress-testing framework that enables to investigate the impact of various macroeconomic variables on the probability of default. We find that trade arrears, interest burden and receivables cash conversion cycle are the most frequent determinants of default both at short term and long term horizon. We also develop two separate default models for large firms and foreign trade firms. We determine a measure of risk to financial stability – debt at risk – via the direct channel, by multiplying the estimated probability of default with the outstanding bank loans. Debt at risk is concentrated into above average risk firms, but risks to financial stability stemming from the real sector remain at a moderate level. Finally we propose some guidelines on how to build stress-testing scenarios that enables to analyze the impact of various macroeconomic shocks on the probabilities of default. We find that non-financial firms are resilient to potential interest rate shocks, which is consistent with the fact that firms finance their activity through bank loans only to a small extent.