IDEAS home Printed from https://ideas.repec.org/p/bno/worpap/2004_02.html

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.norges-bank.no/globalassets/upload/import/publikasjoner/arbeidsnotater/pdf/arb-2004-02.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    2. Liu, Cc & Ryan, Sg, 1995. "The Effect Of Bank Loan Portfolio Composition On The Market Reaction To And Anticipation Of Loan Loss Provisions," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 33(1), pages 77-94.
    3. 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.
    4. 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.
    5. Sean Becketti & Charles S. Morris, 1992. "Are bank loans still special?," Economic Review, Federal Reserve Bank of Kansas City, vol. 77(Q III), pages 71-84.
    6. Scholes, Myron S & Wilson, G Peter & Wolfson, Mark A, 1990. "Tax Planning, Regulatory Capital Planning, and Financial Reporting Strategy for Commercial Banks," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 625-650.
    7. Caminal, Ramon & Matutes, Carmen, 2002. "Market power and banking failures," International Journal of Industrial Organization, Elsevier, vol. 20(9), pages 1341-1361, November.
    8. Boyd, John H. & Runkle, David E., 1993. "Size and performance of banking firms : Testing the predictions of theory," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 47-67, February.
    9. 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.
    10. William R. Keeton, 1999. "Does faster loan growth lead to higher loan losses?," Economic Review, Federal Reserve Bank of Kansas City, vol. 84(Q II), pages 57-75.
    11. 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.
    12. Mr. Edward J Frydl, 1999. "The Length and Cost of Banking Crises," IMF Working Papers 1999/030, International Monetary Fund.
    13. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Henrik Andersen, 2009. "Norwegian banks in a recession: Procyclical implications of Basel II," Working Paper 2009/04, Norges Bank.
    2. Khemraj, Tarron & Pasha, Sukrishnalall, 2009. "The determinants of non-performing loans: an econometric case study of Guyana," MPRA Paper 53128, University Library of Munich, Germany.
    3. Adam Głogowski, 2008. "Macroeconomic determinants of Polish banks’ loan losses – results of a panel data study," NBP Working Papers 53, Narodowy Bank Polski.
    4. Mr. Rupert D Worrell, 2004. "Quantitative Assessment of the Financial Sector: An Integrated Approach," IMF Working Papers 2004/153, International Monetary Fund.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cristian BARRA & Roberto ZOTTI, 2019. "Bank Performance, Financial Stability And Market Concentration: Evidence From Cooperative And Non‐Cooperative Banks," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 90(1), pages 103-139, March.
    2. Wu, Ji & Guo, Mengmeng & Chen, Minghua & Jeon, Bang Nam, 2019. "Market power and risk-taking of banks: Some semiparametric evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 41(C).
    3. Brei, Michael & Jacolin, Luc & Noah, Alphonse, 2020. "Credit risk and bank competition in Sub-Saharan Africa," Emerging Markets Review, Elsevier, vol. 44(C).
    4. Ahamed, M. Mostak & Mallick, Sushanta, 2017. "Does regulatory forbearance matter for bank stability? Evidence from creditors’ perspective," Journal of Financial Stability, Elsevier, vol. 28(C), pages 163-180.
    5. International Monetary Fund, 2007. "Italy—Assessing Competition and Efficiency in the Banking System," IMF Working Papers 2007/026, International Monetary Fund.
    6. Calice, Pietro & Leonida, Leone & Muzzupappa, Eleonora, 2021. "Concentration-stability vs concentration-fragility. New cross-country evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    7. Samantas, Ioannis, 2013. "Bank competition and financial (in)stability in Europe: A sensitivity analysis," MPRA Paper 51621, University Library of Munich, Germany.
    8. Beck, Thorsten, 2008. "Bank competition and financial stability : friends or foes ?," Policy Research Working Paper Series 4656, The World Bank.
    9. Akhigbe, Aigbe & McNulty, James E., 2011. "Bank monitoring, profit efficiency and the commercial lending business model," Journal of Economics and Business, Elsevier, vol. 63(6), pages 531-551.
    10. Cristian BARRA & Roberto ZOTTI, 2017. "Bank Performance, Financial Stability and Market Competition: do Cooperative and Non-Cooperative Banks Behave Differently?," CELPE Discussion Papers 143, CELPE - CEnter for Labor and Political Economics, University of Salerno, Italy.
    11. Ioannis G. Samantas, 2016. "On the optimality of bank competition policy," Working Papers 209, Bank of Greece.
    12. Stefan Arping, 2014. "Does Competition make Banks more Risk-seeking?," Tinbergen Institute Discussion Papers 14-059/IV, Tinbergen Institute.
    13. David VanHoose, 2013. "Implications of Shifting Retail Market Shares for Loan Monitoring in a Dominant-Bank Model," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(3), pages 291-316, July.
    14. Joohyung Ha, 2021. "Bank accounting conservatism and bank loan quality," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 498-532, March.
    15. Chen, Minghua & Wu, Ji & Jeon, Bang Nam & Wang, Rui, 2017. "Monetary policy and bank risk-taking: Evidence from emerging economies," Emerging Markets Review, Elsevier, vol. 31(C), pages 116-140.
    16. Altunbaş, Yener & Khan, Atiqur & Thornton, John, 2023. "Disclosure and bank risk: Evidence from European banks," Finance Research Letters, Elsevier, vol. 58(PB).
    17. Iftekhar Hasan & Larry D. Wall, 2004. "Determinants of the Loan Loss Allowance: Some Cross‐Country Comparisons," The Financial Review, Eastern Finance Association, vol. 39(1), pages 129-152, February.
    18. Peter Chen & Lane Daley, 1996. "Regulatory Capital, Tax, and Earnings Management Effects on Loan Loss Accruals in the Canadian Banking Industry," Contemporary Accounting Research, John Wiley & Sons, vol. 13(1), pages 91-128, March.
    19. Emrah Arbak, 2017. "Identifying the provisioning policies of Belgian banks," Working Paper Research 326, National Bank of Belgium.
    20. Pallavi Chavan & Leonardo Gambacorta, 2016. "Bank lending and loan quality: the case of India," BIS Working Papers 595, Bank for International Settlements.

    More about this item

    Keywords

    ;
    ;
    ;

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bno:worpap:2004_02. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nbgovno.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.