The article explores how closely connected companies in the same industry can affect credit risk. By considering both common factors and industry-specific errors, the researchers found that including industry effects can significantly increase estimates of potential losses. This new model better captures fluctuations in credit losses during tough times, helping banks and regulators set appropriate capital requirements. Capital buffers based on this model will be larger during economic downturns and smaller in better times, preventing both overcapitalization and undercapitalization.