ABSTRACT
The time dimension of risk is the relationship between the credit risk and the business cycle. In fact, credit risk is determined both by idiosyncratic risk factors related to the single obligor features and by systematic risk factors affecting the creditworthiness of all the obligors. The time dimension of credit risk might have a quite obvious impact on the stability of the financial system, bringing about systemic implications. Systemic risk can be identified either in a 'vertical perspective' as a contagion among banks, or in a 'horizontal perspective' as the interconnection between the financial system and the real economy. The relationship between credit risk measurement and the business cycle has given rise to a wide literature, which was also fostered by the consultative documents related to Basel II in relation to the 'procyclicality issue'. Procyclicality is commonly meant as the phenomenon of business cycle amplification due to the reduction in credit availability in recession periods.
