Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2015-05-04
Revision-Date: 2017-09-01
Number: 15-050/III
Author-Name: Bart Keijsers
Author-Workplace-Name: Erasmus University Rotterdam, the Netherlands
Author-Name: Bart Diris
Author-Workplace-Name: Erasmus University Rotterdam, the Netherlands
Author-Name: Erik Kole
Author-Workplace-Name: Erasmus University Rotterdam, the Netherlands
Title: Cyclicality in Losses on Bank Loans
Abstract: Based on unique data we show that macro variables, the default rate and loss given default of bank loans share common cyclical components. The innovation in our model is the distinction between loans with either severe or mild losses. The variation in the proportion of these two types drives the cyclic behavior of the loss given default, and constitutes the links with the default rate and macro variables. These links vary according to loan and borrower characteristics. During downturns, the proportion of defaults with severe losses increases, but the distribution of losses conditional on their being mild or severe does not
change. Though loans are monitored more closely than bonds and are more senior, the cyclical variation in their losses resembles those for bonds, albeit around a lower average
level. This variation leads to an increase in the capital reserves required for loan portfolios.
Classification-JEL: C32, C58, G21, G33
Keywords: Loss-given-default, default rates, credit risk, capital requirements, dynamic factor models
File-Url: https://papers.tinbergen.nl/15050.pdf
File-Format: application/pdf
File-Size: 1149250 bytes
Handle: RePEc:tin:wpaper:20150050