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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)

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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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Publisher 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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Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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  1. J. M. R. Murteira & Joao M. C. Santos Silva, 2000. "Estimation of Default Probabilities Using Incomplete Contracts Data," Econometric Society World Congress 2000 Contributed Papers 1121, Econometric Society. [Downloadable!]
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