The Effect of Company Capital Structure on the Credit Risk of Bank

Company capital structure is one of the essential factors for loan credit risk. It is necessary to comprehensively study the relationship between the leverage and credit risk for the improvement of credit risk management. Firstly, according to the option theory, a credit risk model based on capital structure was formed. Then, two main conclusions about default probability and company moral hazard were brought forward: (1) the default probability had positive correlation to the ratio of asset to liability;(2) If the managers thought bankruptcy would not happened, their motivation of asset substitution would be boosted with the rise of debt/asset level. Finally, the practical values of these findings for the bank management of credit risk were highlighted.