Empirical consumer credit risk analysis: Economic and legislative evidence from the Japanese consumer credit market

We use a unique account level dataset to analyze consumer bankruptcy behavior in Japan and to identify underlying fundamental reasons driving the rapidly rising trend. The key contributions are: (1) The first major empirical study on consumer bankruptcy outside US. (2) A simple theoretical model to explain the impact of the bankruptcy legislation. (3) Explicit modeling of the dynamic nature of a rich panel dataset by employing the semi-parametric and non-parametric duration models. (4) Empirical testing of the legislative impact on bankruptcy probability and credit usage by disentangling time-fixed economic risk factors, time-varying economic risk factors and legislative factors.;We select a set of significant demographic variables to account for the idiosyncratic risk that represents the fixed component of economic risk factors. We also include the monthly consumer confidence index and age polynomial variables in the model to account for the time-varying component of economic risk factors. The key finding is that even if we control for economic risk factors, the bankruptcy probability still monotonically increases during our observation period from November 2000 to June 2002, which coincides with a period of significant change in Japanese personal bankruptcy legislation. Our empirical evidence concludes that the new legislative change plays a significant role in the rapid rise of the personal bankruptcy rate and the change in credit usage behavior in Japan. The implications for consumer credit risk policy are also discussed.