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Commercial Bank Loan Loss Recoveries

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  • Kurt Hess

    ()
    (University of Waikato)

  • Arthur Grimes

    ()
    (Motu Economic and Public Policy Research and University of Waikato)

Abstract

We present a new approach to analyse historical recovery rates on distressed bank assets. Our approach uses banks’ reported impaired assets and the corresponding specific provisions. The dynamics and drivers of this credit loss recovery proxy are studied for a comprehensive sample of Australian banks from 1989 to 2005. We find that macroeconomic and bank-specific factors influence banks’ estimates of loan loss recoveries, consistent with banks smoothing their earnings. In contrast with findings based on prices of distressed corporate bonds, banks record lower recoveries in years of strong economic growth.

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File URL: ftp://mngt.waikato.ac.nz/RePEc/wai/econwp/0909.pdf
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Bibliographic Info

Paper provided by University of Waikato, Department of Economics in its series Working Papers in Economics with number 09/09.

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Length: 18 pages
Date of creation: 01 Nov 2009
Date of revision:
Handle: RePEc:wai:econwp:09/09

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Keywords: banking; credit risk; loan loss recoveries; loss given default; Australia;

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  1. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  2. Edward Altman & Andrea Resti & Andrea Sironi, 2004. "Default Recovery Rates in Credit Risk Modelling: A Review of the Literature and Empirical Evidence," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 33(2), pages 183-208, 07.
  3. Vicente Salas & Jesús Saurina, 2002. "Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks," Journal of Financial Services Research, Springer, vol. 22(3), pages 203-224, December.
  4. Kurt Hess & Arthur Grimes & Mark J. Holmes, 2008. "Credit Losses in Australasian Banking," Working Papers in Economics 08/10, University of Waikato, Department of Economics.
  5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  6. Jon Frye, 2000. "Depressing recoveries," Emerging Issues, Federal Reserve Bank of Chicago, issue Oct.
  7. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
  8. Douglas K. Pearce, 1983. "Stock prices and the economy," Economic Review, Federal Reserve Bank of Kansas City, issue Sep, pages 7-22.
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