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Commercial Bank Loan Loss Recoveries


  • Kurt Hess

    () (University of Waikato)

  • Arthur Grimes

    () (Motu Economic and Public Policy Research and University of Waikato)


We present a new approach to analyse historical recovery rates on distressed bank assets. Our approach uses banks’ reported impaired assets and the corresponding specific provisions. The dynamics and drivers of this credit loss recovery proxy are studied for a comprehensive sample of Australian banks from 1989 to 2005. We find that macroeconomic and bank-specific factors influence banks’ estimates of loan loss recoveries, consistent with banks smoothing their earnings. In contrast with findings based on prices of distressed corporate bonds, banks record lower recoveries in years of strong economic growth.

Suggested Citation

  • Kurt Hess & Arthur Grimes, 2009. "Commercial Bank Loan Loss Recoveries," Working Papers in Economics 09/09, University of Waikato.
  • Handle: RePEc:wai:econwp:09/09

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    References listed on IDEAS

    1. Edward Altman & Andrea Resti & Andrea Sironi, 2004. "Default Recovery Rates in Credit Risk Modelling: A Review of the Literature and Empirical Evidence," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 33(2), pages 183-208, July.
    2. Kurt Hess & Arthur Grimes & Mark Holmes, 2009. "Credit Losses in Australasian Banking," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 331-343, September.
    3. Douglas K. Pearce, 1983. "Stock prices and the economy," Economic Review, Federal Reserve Bank of Kansas City, issue Sep, pages 7-22.
    4. Vicente Salas & Jesús Saurina, 2002. "Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(3), pages 203-224, December.
    5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    6. Kanagaretnam, Kiridaran & Lobo, Gerald J & Mathieu, Robert, 2003. "Managerial Incentives for Income Smoothing through Bank Loan Loss Provisions," Review of Quantitative Finance and Accounting, Springer, vol. 20(1), pages 63-80, January.
    7. Caprio, Gerard Jr. & Klingebiel, Daniela, 1996. "Bank insolvencies : cross-country experience," Policy Research Working Paper Series 1620, The World Bank.
    8. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    9. Jon Frye, 2000. "Depressing recoveries," Emerging Issues, Federal Reserve Bank of Chicago, issue Oct.
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    More about this item


    banking; credit risk; loan loss recoveries; loss given default; Australia;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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