Journal of Credit Risk

Alessandro Giannozzi
University of Florence

Andrea Golfari
Colorado College

It is our pleasure to introduce this special issue of The Journal of Credit Risk, which is dedicated to papers presented at the 2024 International Risk Management Conference “Risk Management Models, Policies, and Practices in Times of High Interest Rates and Uncertainty”. This issue includes some of the outstanding papers presented at the conference.

The first paper in the issue, entitled “The effect of environmental, social and governance disclosure on corporate investment efficiency”, is by Elsa Allman and Joonsung Won, who demonstrate the improvement in investment efficiency following the implementation of the European Directive on ESG disclosure (Directive 2014/95/EU). Their study compares the reporting of US firms with substantial operations in the European Union – and thereby subject to the Directive – compared with US-centric firms unaffected by the directive. The authors’ findings underscore the potential role of ESG disclosure in improving financial outcomes and informing policy on non-financial reporting standards.

The issue’s second paper, “Public interest assessment in resolution of small and medium-sized banks in the European Union” by Andrzej R. Stopczyński, empirically investigates the resolution of distressed banks under the EU Bank Recovery and Resolution Directive (BRRD). The paper raises important questions regarding inconsistencies in the application of public interest assessments (PIAs) leading to divergent resolution practices across EU member states, as well as public financial support that is contingent upon a clear demonstration of “public interest”. Stopczy´nski shows that the recognition of the “public interest” and the use of resolution procedures (rather than normal liquidation) are applied more frequently to small and medium-sized banks that serve local communities, suggesting that national authorities may prioritize regional economic stability over strict systemic risk considerations. He identifies key determinants of PIA and proposes policy recommendations to enhance the transparency and uniformity of resolution practices across the EU.

In “Variance estimation for the quantification of the margin of conservatism category C”, our third paper, Jan Henrik Wosnitza proposes a new approach to estimating the variance of the long-run average default rate (LRADR) for the quantification (complying with supervisory expectations) of the MoC (“margin of conservatism”)in probability of default models. Compared with two comparison approaches from the literature, Wosnitza’s simulation results indicate that the newly developed estimator has a lower bias and variance for a broad set of parameter values, providing a more efficient and accurate estimation of the LRADR’s variance. The author suggests the estimator could be used by internal validation functions and external banking supervisors in order to challenge the level of MoC C determined by model developers.

Finally, the issue’s fourth paper, “A minimum sample size definition for the purpose of loss provision extrapolation in the presence of default correlation” by Henry Penikas, investigates the use of minimum sample size to estimate the loss provisions in a portfolio of loans. The author applies the well-known, though often ignored, properties of the Bernoulli distribution of the total number of correlated events to a novel problem: an extrapolation of the capital provision that does not take into account the possible existence of a default correlation. As a result, he shows that a larger minimum sample size of loans is needed when default correlation is present. The sample size depends upon the absolute and relative differences in default rates, the required significance levels and the levels of statistical power.

We believe that the papers in this special issue will be of great interest to both academics and practitioners. We hope that you enjoy reading them and that you find them both useful and insightful.