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Measuring Non-Performing Loans During (and After) Credit Booms

Author

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  • Dobromił Serwa

    (National Bank of Poland
    Warsaw School of Economics)

Abstract

In this study we evaluate the distortion of the ratio of non-performing loans (NPL) caused by rapid credit growth to show that the bias in this ratio (caused by the prolonged credit boom) may indeed be significant. Next, we discuss an adjustment to the NPL ratio based on a theoretical model of a loan portfolio. This adjustment is robust for credit booms and busts; therefore, it can be used to compare credit quality ratios across distinct portfolios and banks as well as to simulate future NPL ratio developments. Our estimates of the portfolio of housing loans in Poland show that the new adjusted index of non-performing loans is robust to different model specifications.

Suggested Citation

  • Dobromił Serwa, 2013. "Measuring Non-Performing Loans During (and After) Credit Booms," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 5(3), pages 163-183, September.
    • Handle: RePEc:psc:journl:v:5:y:2013:i:3:p:163-183
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    1. Nderitu Kingori, 2016. "Market Structure, Macroeconomic Shocks, and Banking Risk in Kenya," Econometric Research in Finance, SGH Warsaw School of Economics, Collegium of Economic Analysis, vol. 1(2), pages 81-113, December.

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    More about this item

    Keywords

    non-performing loan ratio; credit boom; housing loans;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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