Credit Risk and Simulated Spreads Risk Adjusted for Italian Regions.

Abstract

We analyse the idiosyncratic and systematic elements influencing Italian firms’ probability of default (PD) and examine the relationship between credit risk and borrowing conditions at a regional level. This paper, using regression analysis, examines the causal relationship between PD of a representative sample of Italian firms, together with accounting variables at firm level and macroeconomic data. The underlying hypothesis examines if the riskiness of Italian firms is influenced exclusively by their specific characteristics or, more generally, depends also on the spatial environment where they operate. According to the literature, the interregional differentials in the cost of money depend on the structural difference in the riskiness of borrowers, a crucial factor to comprehend at a regional level. In addition, we estimate a pricing model calculating, on the basis of the borrowers’ PD, the Spread Risk Adjusted (SRA), a metric that banks consider in order to quantify lending rates and borrowers’ credit risk. The final task is the evaluation of the New Basel Capital Accord (Basel II) in terms of regional differences of cost of money computing a SRA for each Italian region.