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Banks' credit loss forecasts: lessons from supervisory data

Author

Listed:
  • Martin Birn
  • Renzo Corrias
  • Christian Schmieder
  • Nikola Tarashev

Abstract

Focusing on credit risk, we compare banks' expected loss (EL) rates, collected confidentially by the Basel Committee on Banking Supervision from 2009 to 2022, and the corresponding actual loss (AL) rates, as reported in vendor data. Consistent with the use of through-the-cycle risk estimates for regulatory purposes, EL rates rarely move in line with AL rates over time, which helps explain a large precautionary element in Basel III capital requirements. We also find that the rank-order of EL rates across banks matches closely that of the AL rates, in line with recent and forthcoming regulatory efforts to improve risk-measurement practices. EL rates are more likely to be excessively optimistic on the heels of higher bank profitability and financial overheating, as captured by the credit-to-GDP gap.

Suggested Citation

  • Martin Birn & Renzo Corrias & Christian Schmieder & Nikola Tarashev, 2023. "Banks' credit loss forecasts: lessons from supervisory data," BIS Working Papers 1125, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1125
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    References listed on IDEAS

    as
    1. Mikael Juselius & Nikola Tarashev, 2020. "Forecasting expected and unexpected losses," BIS Working Papers 913, Bank for International Settlements.
    2. Mr. Stijn Claessens & Mr. Luc Laeven & Ms. Deniz O Igan & Mr. Giovanni Dell'Ariccia, 2010. "Lessons and Policy Implications from the Global Financial Crisis," IMF Working Papers 2010/044, International Monetary Fund.
    3. repec:zbw:bofrdp:2020_018 is not listed on IDEAS
    4. Bernhard Herz & Jochen Keller, 2023. "How Do Regulators Set the Countercyclical Capital Buffer?," International Journal of Central Banking, International Journal of Central Banking, vol. 19(3), pages 99-137, August.
    5. Li Lian Ong & Min Wei & Christian Schmieder, 2023. "Insights into credit loss rates: a global database," BIS Working Papers 1101, Bank for International Settlements.
    6. Krüger, Steffen & Rösch, Daniel & Scheule, Harald, 2018. "The impact of loan loss provisioning on bank capital requirements," Journal of Financial Stability, Elsevier, vol. 36(C), pages 114-129.
    7. Mikael Juselius & Nikola Tarashev, 2020. "Forecasting expected and unexpected losses," BIS Working Papers 913, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • P52 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Studies of Particular Economies

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