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A Multinomial Logit Analysis of Problem Loan Resolution Choices in Banking

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  • Lawrence, Edward C
  • Arshadi, Nasser
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    Abstract

    This paper presents a conceptual framework of problem loan resolution choices that is a function of the combined borrower and lender decisions. A bank will choose a workout option if its expected value is greater than the outcome under a no-workout plan. For the borrower, if the reputational penalty due to a default is less than the opportunity cost of the best new alternative, the borrower will have an incentive to default. If the reverse holds then the borrower will be better-off with a loan workout. Using a unique data set composed of borrower, lender and economic factors we empirically examine the problem loan resolution choices. The, results provide support for our conceptual framework that problem loan choices are based on combined borrower/lender variables. Copyright 1995 by Ohio State University Press.

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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 27 (1995)
    Issue (Month): 1 (February)
    Pages: 202-16

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    Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:1:p:202-16

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Michelle A. Danis & Anthony Pennington-Cross, 2005. "A dynamic look at subprime loan performance," Working Papers 2005-029, Federal Reserve Bank of St. Louis.
    2. Timotej Jagric & Vita Jagric & Davorin Kracun, 2011. "Does Non-linearity Matter in Retail Credit Risk Modeling?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(4), pages 384-402, August.
    3. Ha-Thu Nguyen, 2014. "Default Predictors in Credit Scoring - Evidence from France’s Retail Banking Institution," EconomiX Working Papers 2014-26, University of Paris West - Nanterre la Défense, EconomiX.
    4. Michelle A. Danis & Anthony Pennington-Cross, 2005. "The delinquency of subprime mortgages," Working Papers 2005-022, Federal Reserve Bank of St. Louis.
    5. Anthony Pennington-Cross, 2006. "The duration of foreclosures in the subprime mortgage market: a competing risks model with mixing," Working Papers 2006-027, Federal Reserve Bank of St. Louis.
    6. Evžen Kocenda & Martin Vojtek, 2009. "Default Predictors and Credit Scoring Models for Retail Banking," CESifo Working Paper Series 2862, CESifo Group Munich.

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