Macroeconomic factors in Probability of Default : A study applied to a Swedish credit portfolio

Abstract: Macroeconomic conditions can impact the payment capacity of individual mortgage holders' household loans. If the clients of a bank's retail credit portfolio experience deteriorating paymentcapacity it will reflect on the probability of default of the overall portfolio. With IFRS 9, banks are expected to sophisticate their calculations of expected credit loss, demanding forward-looking estimates of probability of default by incorporation of macroeconomic forecasts. Finding what macroeconomic factors have a statistical significant relationship to the actual default frequency of a portfolio can aid banks in estimating probability of default with reference to current and forecasted macroeconomic conditions. This study aims to explore the relationship between macroeconomic factors and the default frequency in a Swedish retail credit portfolio. The research is based on quantitative data analysis of historical default data, complemented by implications of the macroeconomic condition on the payment capacity of households from a theoretical perspective. Macroeconomic factors studied are the Swedish gross domestic product, house price index, reporate and unemployment rate. The supporting data consists of default data from Nordea's Swedishretail credit portfolio. The time period covers 2008-2015 and provides basis for analysis of a timeperiod with different conditions in the macroeconomy, including effects of the 2008 financial crisis. A multiple linear regression model is used as a method to suggest the relationship between themacroeconomic factors and the default frequency. The model coefficients are estimated with calculations of Ordinary Least Squares and the significance supported by statistical test. Results show that gross domestic product and repo rate are statistically significant macroeconomic variables in explaining changes in the default frequency and thus probability of default of a Swedish retail credit portfolio.