Transcript The cross-selling of bank credit and services

Does uncertainty matter for loan
charge-offs?
Laetitia Lepetit, Frank Strobel and David Dickinson
Research Conference on Safety and
Efficiency of the Financial System, Manila
August 27, 2007
Objective
• analysis of loan charge-off behavior of banks
– non-performing loans need to be charged off
– behavior has discretionary elements, e.g. management
of regulatory capital
– consider additional element related to uncertainty about
economic environment
• build theoretical model and perform empirical
analysis
2
Theoretical model
• develop stylized real options model of bank's
decision whether or not to charge off a currently
non-performing loan when
– there is chance of full loan recovery
– expected present value of reinvesting potentially
reclaimed collateral is uncertain
• demonstrate that bank proves less willing to
charge off non-performing loan than in classical
certainty case
3
Theoretical model (cont.)
• increased uncertainty about and trend in expected
value of collateral increases bank's tendency to
delay loan charge-off
• better general economic conditions, increasing the
probability of loan recovery, reduce bank's
willingness to delay loan charge-off
banks have discretionary behavior regarding
loan charge-offs related to variability in market for
collateral and general economic conditions
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Empirical analysis
• test this hypothesis of "uncertainty management"
in loan charge-offs
• use a panel of European commercial, savings and
cooperative banks over the period 1992 to 2005
• estimate the following equation using GMM
NCOit   NCOit 1   X it  1 log(GDP)it   2 R3M it   3 M it
 4 H it  i  it
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Empirical analysis (cont.)
Eq.
(Obs)
NCO it 1
NPL it
()
()
LOANSit 1
()
TCR it
LOG(TA)it
M it
()
(?)
()
 log(GDP) it
R3M it
()
()
()
J-stat
(Pvalue)
H it
Arellano and Bover (1995) estimator
(2.1)
(552)
0.090***
(140.651)
0.063***
(42.169)
0.004***
(42.413)
_
_
-0.014***
(-103.057)
-0.006***
(-7.792)
0.067***
(36.479)
0.032***
(38.980)
41.489
(0.45)
(2.2)
(552)
0.111***
(137.582)
0.062***
(68.586)
0.004***
(33.238)
_
0.562***
(72.010)
-0.018***
(-79.389)
-0.009***
(-11.043)
0.095***
(29.067)
0.070***
(72.798)
41.781
(0.35)
(2.3)
(506)
0.091***
(4.467)
0.065***
(5.151)
_
0.014
(1.048)
_
-0.006***
(-3.955)
-0.002*
(-1.814)
0.036***
(2.593)
0.062***
(7.397)
30.405
(0.44)
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