Default risk and private student loans: Implications for higher education policies

In recent years, the proportion of students facing a binding constraint on government student loans has grown. This has led to substantially increased use of private loans as a supplementary source of finance for households׳ higher education investment. A critical aspect of the private market for student loans is that loan terms must reflect students׳ risk of default. College investment will therefore differ from a world in which government student loans, whose terms are not sensitive to credit risk, are expanded to no longer bind. Moreover, beyond simply crowding out private lending, expansions of the government student loan program will feed back into default risk on private loans. The goal of this paper is to provide a quantitative assessment of the likely effects of the private market for student loans on college enrollment. We build a model of college investment that reflects uninsured idiosyncratic risk and a well-defined life-cycle that is consistent with observed borrowing and default behavior across family income and college preparedness. We find that higher government borrowing limits increase college investment but lead to more default in the private market for student loans, while tuition subsides increase college investment and reduce default rates in the private market. Consequently, higher limits on government student loans have small negative welfare effects, while tuition subsidies increase aggregate welfare.     

Ethnic Fractionalization,Governance and Loan Defaults in Africa

We present a theoretical model of an imperfectly competitive loans market that is suitable for emerging economies in Africa. The model allows for variation in both the level of contract enforcement (the quality of governance) and the degree of market segmentation (the level of ethnic fractionalization). The model predicts a specific form of nonlinearity in the effects of these variables on loan default. Empirical analysis using African panel data for 110 individual banks in 28 countries over 2000–08 provides strong evidence for these predictions. Our results have important implications for the conditions under which policy reform will enhance financial development.     

Availability of Mortgage Loans in Volatile Real Estate Markets

This paper presents a default model for mortgages on single-family houses implying a higher probability of negative equity and thus default in real estate markets with high price volatility. Mortgage lenders compensate for the increased default probability in volatile markets by demanding higher downpayments or increased creditworthiness of loan applicants, thus making mortgage loans more difficult to obtain. An empirical analysis finds greatly varying price volatility in single-family real estate markets in a sample of 42 cities. Consistent with the implications of the model, the empirical analysis finds that the fraction of low-downpayment loans declines in volatile markets.     

Macroeconomic factors, consumer behavior, and bankcard default rates

Over the period from 1981 through 1999, we investigate the relationship between bankcard delinquencies and key macroeconomic variables. Changes in the proportion of accounts in default are statistically related to the consumer debt ratio. When the delinquency rate is calculated based on the number of dollars outstanding, it is related to the total amount of revolving debt. We also find evidence consistent with a pattern of selective default behavior, in which consumers will default on bankcard debt before defaulting on other types of installment loans.     

Measuring Credit Risk of a Bank's Corporate Loan Portfolio Using Advanced Internal Ratings Base Approach

Abstract

The use of technical and advanced approaches in the measurement of credit risk of banks' portfolios has nowadays become a very hot issue. The most recent technical report issued by the Basel Committee in May 2003 has concentrated heavily on the measurement of credit risk using either foundation or advanced Internal Ratings Base (IRB) approaches. This empirical research study attempts to measure credit risk of a bank's corporate loan portfolio, including firms from 10 different Turkish sectors. The monthly observations of the total amount of corporate loans and the total amount of corporate loans at default across various sectors are downloaded from the web page of Central Bank of Turkey (CBT) in a period of 1999-2002. This period covers 47 monthly observations since CBT has captured sectoral corporate loans beginning of 1999. Therefore, the observed sectoral default rates are needed to be simulated to obtain a nicely shaped distribution. Monte Carlo simulation is applied for 1,000 times. Based on the simulated default rates, the expected sectoral default rates are computed. Next, a credit quality rating scale is fitted into sectoral default rates distributions. Finally, the sectoral weights in the whole loan portfolio are multiplied by the expected sectoral default rates matrix, considering cross-sectoral correlations to get the total amount of the bank's credit risk and capital requirement. It is assumed that sectoral monthly default rates are a good representative of the default risk of a sample bank's corporate loan portfolio since no publicly available data on any particular bank's corporate loan portfolio composition exists. Nevertheless, this research may be a good application for measuring the credit risk of banks' corporate loan portfolios using advanced IRB approach.     

Convertible tranche in securitization

It is essential to motivate a banker in order to diligently screen borrowers if the banker has the option to securitize its loans and sell part of it to outside investors. Based on theoretical analysis and experimental research, we propose that issuing a convertible tranche in securitization can not only motivate a banker to exert greater effort to screen loans, but also lead to higher prices for selling tranches. A convertible tranche can also increase the sale proportion of the loan pool under the condition of ensuring socially optimal effort, thereby increasing more social surplus than a static tranche. The optimal convertible proportion is positively related to the natural proportion of high-default-risk borrowers, the borrowers’ default possibilities, and the screening cost. The value of the convertible option is higher in an economic downturn. Consequently, not only should regulators formulate policies on the convertible proportion under consideration of the economic state, but also adopt a counter-cyclical policy.     

我国商业银行资本充足率的影响因素研究

本文以我国A股上市的6家商业银行2015~2018年的财务年度数据为研究样本,实证分析商业银行资本充足率的影响因素。结果表明:权益、贷款、利润、不良贷款率四个方面的增速都可促进资本充足率增速的提升;利润增速及不良贷款率增速与资本充足率增速呈现相反态势。各大商业银行可利用股票的增值发行、长期次级债券的发行,或通过整改完善自身资产结构、调节资产组合、避免不良贷款出现以及提升应对市场风险的能力等举措提升自身资本充足率。     

A novel profit cutting mechanism for Chinese Banks: Theory and Multi-dimensional evidence

As China’s macroeconomic growth faces increasing pressure from the global COVID-19 pandemic, a surprising and politically controversial phenomenon has emerged: the profitability of banks in China exceeded that of enterprises and non-financial industries. The People’s Bank of China and regulatory authorities have hence taken measures to incentivize banks to transfer part of their profits to enterprises, with the aim to stabilize enterprises and employment. This paper proposes a novel profit cutting mechanism focusing on loan structure adjustments to address the limitations of the current approach centering on lowering loan interest rates. The theoretical and empirical analysis show, at both the macro and micro level, that an increase in the proportion of credit loans can benefit the development of enterprises without weakening banks’ operating performance in the long term, leading to a Pareto improvement within enterprise-banking sectors. The findings suggest that banks in China should gradually adjust their loan structures by providing greater credit loan access to enterprises, either voluntarily or directed by policy.     

Predicting loss given default (LGD) for residential mortgage loans: A two-stage model and empirical evidence for UK bank data

With the implementation of the Basel II regulatory framework, it became increasingly important for financial institutions to develop accurate loss models. This work investigates the loss given default (LGD) of mortgage loans using a large set of recovery data of residential mortgage defaults from a major UK bank. A Probability of Repossession Model and a Haircut Model are developed and then combined to give an expected loss percentage. We find that the Probability of Repossession Model should consist of more than just the commonly used loan-to-value ratio, and that the estimation of LGD benefits from the Haircut Model, which predicts the discount which the sale price of a repossessed property may undergo. This two-stage LGD model is shown to perform better than a single-stage LGD model (which models LGD directly from loan and collateral characteristics), as it achieves a better R² value and matches the distribution of the observed LGD more accurately.     

聚合信用风险模型的改进和研究

近年来的研究发现,违约损失率的分布呈现一种双峰特征。文章对传统聚合信用风险模型进行改进,用具有双峰特征的双beta分布来刻画违约损失率的变化,给出全部贷款组合信用风险概率生成函数的解析式,利用数值模拟的结果验证了模型的有效性。     

Residential mortgage default: Theory works and so does policy

Using a national loan level data set we examine loan default as explained by local demographic characteristics and state level legislation that regulates foreclosure procedures and predatory lending, using a hierarchical linear model. When controlling for loan and local conditions, we observe significant variation in the default rate across states, with lower default levels in states with higher temporal and financial costs to lenders. State level legislative influences provide a foundation for discussion of national level policy that further regulates predatory lending and financial institution foreclosure activities.     

Competitive bank pricing and adverse selection,with implications for testing the SCP hypothesis

Adverse borrower selection implies that competitive interest rates on bank loans will be an increasing function of the number of banks in the market, whenever the marginal cost of lending does not rise too sharply with market concentration (a condition supported by a variety of empirical evidence). Moreover, this linkage is stronger during economic recessions when more loans default. These findings suggest a need to reinterpret many prior empirical studies of loan price versus concentration, as well as raising new considerations in the appropriate construction of future empirical tests.     

Probability of default in collateralized credit operations for small business

The paper examines how the collateral affects the probability of default for small firms. We present a stylized theoretical model to derive the relationship between the level of collateral and subsequent loan default. We find that the probability of default is negatively correlated with the level of collateral, which is intuitive. Subsequently, we test this relationship by using a proprietary database of collateralized loans of small Brazilian enterprises.     

Is the secondary loan market valuable to borrowers?

In recent years, the secondary loan market has developed into an over-the-counter market where loans are not only sold but also subsequently traded. This shift away from traditional banking is altering the business of lending. Loan sales are valuable to banks because they free up capital, generate fee-based income and facilitate risk management; but they may be costly to borrowers because they negatively affect bank monitoring incentives. In this paper, however, we argue that there is another potential benefit to borrowers from loan sales. Borrowers with trading loans, in particular those with liquid loans, may “demand” a share of bank benefits from loan sales when they take out new loans as it will be easier for banks to sell these loans afterwards. We investigate this potential benefit of the secondary loan market by comparing the interest rates borrowers pay before their loans start to trade with the interest rates they pay on loans originated post-trading. Our results show that, on average, borrowers pay higher spreads on the loans they take out after the onset of trading on their loans. Importantly, our results also show that borrowers with liquid trading loans are able to borrow at lower interest rates after the onset of trading on their loans. Thus, while the banks’ decision to sell loans may initially impose a cost on borrowers, those whose loans enter the secondary loan market and become liquid benefit from an interest rate discount on their subsequent loans.     

The interest rate spreads in the Czech Republic: Different loans,different determinants?

We analyze the determinants of interest rate spreads of different loan categories in the Czech Republic during 2004–2011. We employ a detailed bank supervisory dataset that allows us to construct the actual spreads for four loan categories, namely small and large corporate loans, consumer loans and mortgages, on a monthly basis. Our regression analysis shows that bank and macroeconomic characteristics matter more for setting the spreads for small corporate loans and mortgages rather than for large corporate loans and consumer loans. Interest rate risk determines the spreads for all loan categories. The global financial crisis has, to a certain extent, increased the responsiveness of spreads to interest rate risk and liquidity risk.     

Spatial dependence in microfinance credit default

Credit scoring model development is very important for the lending decisions of financial institutions. The creditworthiness of borrowers is evaluated by assessing their hard and soft information. However, microfinance borrowers are very sensitive to a local economic downturn and extreme (weather or climate) events. Therefore, this paper is devoted to extending the standard credit scoring models by taking into account the spatial dependence in credit risk. We estimate a credit scoring model with spatial random effects using the distance matrix based on the borrowers’ locations. We find that including the spatial random effects improves the ability to predict defaults and non-defaults of both individual and group loans. Furthermore, we find that several loan characteristics and demographic information are important determinants of individual loan default but not group loans. Our study provides valuable insights for professionals and academics in credit scoring for microfinance and rural finance.     

Extendible stock loan

In this paper, the model of extendible stock loan with forbearance is proposed. The loan is extendible, so as to prevent immediate losses or to prevent subsequent price drop; while the forbearance is granted only when the pledged share’s value is above threshold, so as to mitigate the risk-taking behavior induced by the extension. The non-synchronization of the liquidation of insolvent stock loans also alleviates the downward leverage spiral in a market downturn. Numerical analysis shows that fair extendible stock loan rates increase with the forbearance level as well as extension period, and loan rates are quite sensitive to the change of asset volatility and debt ratio. For lenders waiving the interest rates during extension period, their burden grows with extension rapidly when they grant looser forbearance and when asset volatility or loan-to-value is higher. Some suggestions are made accordingly. First, lenders offering uniform extendible loan rate can let borrowers choose between looser forbearance with shorter extension, or tighter forbearance with longer extension. Second, if the loan rate is priced fairly, lower margin requirement can only be accomplished with tighter forbearance. More looser forbearance worth higher rates.     

Local economic risk factors and the primary and secondary mortgage markets

This paper presents a cross-sectional analysis of the spatial distribution of loans in the primary and secondary mortgage markets. Aggregating loan originations to the MSA level, we examine the proportion of the market served by FHA and conventional lenders. We model the geographic differences in market shares as a function of supply, demand, and economic risk factors. Results indicate that FHA market shares are higher in cities with higher economic risk characteristics. To examine the role of GSE activity, we model the spatial distribution of the disposition of conventional loans. Again, we focus on the impact of local economic risk factors on the proportion of loans purchased by the GSEs, purchased by other financial institutions, or retained by the originating lender. Our results indicate that GSEs purchase rates are fairly insensitive to local economic conditions indicating that they serve the primary market with little spatial variation.     

An analysis of default risk in the Home Equity Conversion Mortgage (HECM) program

While reverse mortgages are intended as a tool to enable financial security for older homeowners, in 2014, nearly 12 percent of reverse mortgage borrowers in the federally insured Home Equity Conversion Mortgage (HECM) program were in default on their property taxes or homeowners insurance. Unlike the traditional mortgage market, there were no risk-based underwriting guidelines for HECMs through 2014. In response to the relatively high default rate, a variety of policy responses were implemented, including establishing underwriting guidelines. However, there is a lack of data and analysis to inform such criteria. Our analysis follows 30,000 seniors counseled for reverse mortgages between 2006 and 2011. The data includes comprehensive financial and credit report attributes, not typically available in analyses of reverse mortgage borrowers. Using a bivariate probit model that accounts for selection, we estimate the likelihood of tax and insurance default. Financial characteristics that increase default risk include the percentage of funds withdrawn in the first month of the loan, a lower credit score, higher property tax to income ratio, low or no unused revolving credit, and a history of being past due on mortgage payments or having a tax lien on the property. Our estimate of the elasticity of default with respect to credit scores is similar to that for closed-end home equity loans, but higher than that for HELOCs. We simulate the effects of alternative underwriting criteria and policy changes on the probability of take-up and default. Reductions in the default rate with a minimal effect on participation can be achieved by requiring that participants with low credit scores set aside some of their HECM funds for future property tax and insurance payments, a form of escrowing.