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Duration of consumer loans and bank lending policy: dormancy versus default risk


  • Carling, Kenneth

    () (Office of Labor Market Policy Evaluation)

  • Jacobson, Tor

    () (Research Department)

  • Roszbach, Kasper

    () (Dept. of Economics, Stockholm School of Economics)


A bank that lends money to a household faces two types of risk. Most commonly mentioned is the risk of a default. Hardly ever referred to is the risk of an early redemption of the loan - leading to dormancy. We model consumer loans' transition from an active to a dormant state and estimate a semi-parametric duration model with a data set consisting of 4,733 individuals who were granted credit by a Swedish lending institution between 1993 and 1995. We analyze the factors that determine the time to maturity on a loan and investigate the model's ability to match the maturities observed in the data. The model is used to evaluate loan applicants by their expected durations and - profits, and to derive the distribution of conditional expected durations and - profits for the loan portfolio. This enables us to draw some conclusions about the efficiency of bank lending policy.

Suggested Citation

  • Carling, Kenneth & Jacobson, Tor & Roszbach, Kasper, 1998. "Duration of consumer loans and bank lending policy: dormancy versus default risk," SSE/EFI Working Paper Series in Economics and Finance 280, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0280 Note: Forthcoming in the Journal of Banking and Finance

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    References listed on IDEAS

    1. Subal Kumbhakar & Almas Heshmati & Lennart Hjalmarsson, 2002. "How Fast Do Banks Adjust? A Dynamic Model of Labor-Use with an Application to Swedish Banks," Journal of Productivity Analysis, Springer, vol. 18(1), pages 79-102, July.
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    4. Kumbhakar, Subal C & Hjalmarsson, Lennart, 1995. "Labour-Use Efficiency in Swedish Social Insurance Offices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(1), pages 33-47, Jan.-Marc.
    5. Fallon, Peter R. & Lucas, Robert E. B., 1993. "Job security regulations and the dynamic demand for industrial labor in India and Zimbabwe," Journal of Development Economics, Elsevier, vol. 40(2), pages 241-275, April.
    6. Pindyck, Robert S & Rotemberg, Julio J, 1983. " Dynamic Factor Demands under Rational Expectations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 85(2), pages 223-238.
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    Cited by:

    1. Santos Silva, J.M.C. & Murteira, J.M.R., 2009. "Estimation of default probabilities using incomplete contracts data," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 457-465, June.
    2. Carling, Kenneth & Jacobson, Tor & Roszbach, Kasper, 2001. "Dormancy risk and expected profits of consumer loans," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 717-739, April.

    More about this item


    Bank lending policy; duration analysis; semi-parametric methods; dormancy; cost-benefit analysis.;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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