ABSTRACT
The time dimension of risk is the relationship between the credit risk and the business cycle. 2 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. Systematic risk, being not diversifiable, is of utmost importance in the assessment of credit risk at a portfolio level and is generally dependent on macroeconomic conditions. 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 (ECB, 2009).
