Determinants of Default: Evidence from a Sector-level Panel of Irish SME Loans


  • Martina Lawless Central Bank of Ireland, Dublin
  • Fergal McCann Central Bank of Ireland, Dublin


default, SMEs, loans


This paper uses unique SME loan-level data complete with quarterly loan ratings assigned by the lending institution over the period 2008-2010. This allows us to examine the evolution of loan performance throughout the period of economic and financial crisis. We document the shift in the distribution of loans across ratings as economic conditions deteriorated, but also show that this effect was heterogeneous across sectors. In panel data estimations, changes in employment across sectors are shown to be a leading indicator of loan performance, demonstrating the importance of the link between real economy demand and loan impairment. Levels of outstanding credit in a sector cannot explain current loan performance. However, in keeping with a growing literature on the dangers of post-boom debt overhang, we calculate a measure of excess credit using deviations from a long-run trend that is strongly associated with higher levels of current impairment. This provides new evidence on the effect of relaxed credit standards during a boom on crisis-era loan delinquency.