The severity of potential losses from defaults has recently increased. As a result, accurately assessing credit risk of corporate loans is an important issue and a prerequisite for lending decision. Moreover, banks and regulators have recently taken a marked interest in credit risk modeling for risk management purposes. In this context, the purpose of this study is to estimate credit spreads of corporate credit loans of ‘A Bank’ using the Ericsson & Reneby(2001) model, a structural bond pricing approach and to compare real credit spreads applied by ‘A Bank’ with theoretical credit spreads computed by the ER model. The results of the empirical analysis could be summarized as follows.
The credit spreads of corporate credit loans for relative high credit grade are slightly higher than theoretical ones estimated by the ER model but there are no big differences from theoretical ones, whereas the credit spreads of corporate credit loans for relative low credit grade are much lower than the theoretical ones obtained by using the ER model. In conclusion, ‘A Bank’ should increase credit spreads of corporate credit loans for relative low credit grade to cover the expected loss from bankruptcy of the company.
