Bank risk rating of business loans
In recent years many banks have attempted to improve the measurement and management of credit risk by assigning risk ratings to business loans. Virtually all large banks now assign such ratings. However, until recently there has been little information on the use of risk ratings by smaller banks. Recent revisions to the Federal Reserve's Survey of Terms of Business Lending and telephone consultations with more than 100 banks on the survey panel provide data on the prevalence and precision of risk rating systems at banks of all sizes. We find that the use of risk rating systems is quite widespread, but that smaller banks generally have less detailed systems than do larger banks. In addition, the new survey data allow us to asses the relationships between loan risk ratings and loan terms. Not surprisingly, riskier loans generally carry higher interest rates, even after taking account of other loan terms. There are more complex relationships between loan risk and other loan terms. Regression results indicate that banks of all sizes price for risk. We do not find a relationship between reported loan risk and delinquency and charge-off rates. However, this may reflect how recently the risk rating data have become available.
|Date of creation:||1998|
|Date of revision:|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
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|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
References listed on IDEAS
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- Berger, Allen N. & Udell, Gregory F., 1990.
"Collateral, loan quality and bank risk,"
Journal of Monetary Economics,
Elsevier, vol. 25(1), pages 21-42, January.
- Avery, Robert B. & Berger, Allen N., 1991.
"Loan commitments and bank risk exposure,"
Journal of Banking & Finance,
Elsevier, vol. 15(1), pages 173-192, February.
- Robert B. Avery & Allen N. Berger, 1989. "Loan commitments and bank risk exposure," Finance and Economics Discussion Series 65, Board of Governors of the Federal Reserve System (U.S.).
- Robert B. Avery & Allen N. Berger, 1988. "Loan commitments and bank risk exposure," Finance and Economics Discussion Series 36, Board of Governors of the Federal Reserve System (U.S.).
- Robert B. Avery & Allen N. Berger, 1990. "Loan commitments and bank risk exposure," Working Paper 9015, Federal Reserve Bank of Cleveland.
- Morgan, Donald P, 1998. "The Credit Effects of Monetary Policy: Evidence Using Loan Commitments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(1), pages 102-18, February.
- Thomas F. Brady & William B. English & William R. Nelson, 1998. "Recent changes to the Federal Reserve's survey of terms of business lending," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Aug, pages 604-615.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Mark Carey, 1998. "Credit Risk in Private Debt Portfolios," Journal of Finance, American Finance Association, vol. 53(4), pages 1363-1387, 08.
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