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Duration of consumer loans and bank lending policy: dormancy versus default risk

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Author Info

  • Carling, Kenneth

    ()
    (Office of Labor Market Policy Evaluation)

  • Jacobson, Tor

    ()
    (Research Department)

  • Roszbach, Kasper

    ()
    (Dept. of Economics, Stockholm School of Economics)

Abstract

A bank that lends money to a household faces two types of risk. Most commonly mentioned is the risk of a default. Hardly ever referred to is the risk of an early redemption of the loan - leading to dormancy. We model consumer loans' transition from an active to a dormant state and estimate a semi-parametric duration model with a data set consisting of 4,733 individuals who were granted credit by a Swedish lending institution between 1993 and 1995. We analyze the factors that determine the time to maturity on a loan and investigate the model's ability to match the maturities observed in the data. The model is used to evaluate loan applicants by their expected durations and - profits, and to derive the distribution of conditional expected durations and - profits for the loan portfolio. This enables us to draw some conclusions about the efficiency of bank lending policy.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 280.

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Length: 28 pages
Date of creation: 20 Nov 1998
Date of revision:
Handle: RePEc:hhs:hastef:0280

Note: Forthcoming in the Journal of Banking and Finance
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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Related research

Keywords: Bank lending policy; duration analysis; semi-parametric methods; dormancy; cost-benefit analysis.;

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Cited by:
  1. Santos Silva, J.M.C. & Murteira, J.M.R., 2009. "Estimation of default probabilities using incomplete contracts data," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 457-465, June.
  2. Carling, Kenneth & Jacobson, Tor & Roszbach, Kasper, 2001. "Dormancy risk and expected profits of consumer loans," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 717-739, April.

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