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Aggregate bankruptcy probabilities and their role in explaining banks’ loan losses

Author

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  • Olga Andreeva

    (Norges Bank)

Abstract

Increased competition forces banks to narrow lending margins and at the same time relaxed lending standards worsen the pool of borrowers. To preserve sound banking system it is important task to monitor credit risk as one of the dominant factors leading to bank failures and financial vulnerability. Norwegian banks traditionally have a large share of loans to nonfinancial enterprises in their investment portfolios, and we focus on risk related to loans provided to limited liability enterprises. By combining statistics on loans to Norwegian industries and regions and bankruptcy probabilities for individual corporate borrowers, we construct a proxy reflecting risk profile of the banks’ loan portfolios. Aggregation within industries and counties provides a bank-level panel of risk indicators, which are used to estimate banks’ loan losses during the period 1988 – 2001. Constructed aggregate bankruptcy probabilities prove to be meaningful measures, which explain loan losses if we control for the macroeconomic and bank specific factors. JEL Classification: G21, C81

Suggested Citation

  • Olga Andreeva, 2004. "Aggregate bankruptcy probabilities and their role in explaining banks’ loan losses," Working Paper 2004/02, Norges Bank.
  • Handle: RePEc:bno:worpap:2004_02
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    References listed on IDEAS

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    1. Mailath George J. & Mester Loretta J., 1994. "A Positive Analysis of Bank Closure," Journal of Financial Intermediation, Elsevier, vol. 3(3), pages 272-299, June.
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    3. Perotti, Enrico C. & Suarez, Javier, 2002. "Last bank standing: What do I gain if you fail?," European Economic Review, Elsevier, vol. 46(9), pages 1599-1622, October.
    4. John H. Boyd & Pedro Gomis-Porqueras & Sungkyu Kwak & Bruce David Smith, 2014. "A User's Guide to Banking Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 800-892, November.
    5. Berger, Allen N. & DeYoung, Robert, 1997. "Problem loans and cost efficiency in commercial banks," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 849-870, June.
    6. Chirinko, Robert S. & Guill, Gene D., 1991. "A framework for assessing credit risk in depository institutions: Toward regulatory reform," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 785-804, September.
    7. Sean Becketti & Charles S. Morris, 1992. "Are bank loans still special?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 71-84.
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    11. William R. Keeton, 1999. "Does faster loan growth lead to higher loan losses?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 57-75.
    12. Edward J Frydl, 1999. "The Length and Cost of Banking Crises," IMF Working Papers 99/30, International Monetary Fund.
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    Citations

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    Cited by:

    1. Henrik Andersen, 2009. "Norwegian banks in a recession: Procyclical implications of Basel II," Working Paper 2009/04, Norges Bank.
    2. Adam Głogowski, 2008. "Macroeconomic determinants of Polish banks’ loan losses – results of a panel data study," NBP Working Papers 53, Narodowy Bank Polski, Economic Research Department.
    3. Rupert D Worrell, 2004. "Quantitative Assessment of the Financial Sector; An Integrated Approach," IMF Working Papers 04/153, International Monetary Fund.

    More about this item

    Keywords

    Bank losses; bankruptcy probabilities; aggregation;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access

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