Basel Buckets and Loan Losses: Absolute and Relative Loan Underperformance at Banks and Thrifts

Abstract:     
We examine the distribution (across institutions and intertemporally) in charge-off and delinquency rates for six categories of loans held by U.S. banks and thrifts. The sample uses regulatory reporting data for roughly 230,000 institution-years from 1984 to 1999 (comprising over 2 million data items). We find that the Basel risk weights do not accurately track the historical credit experience of U.S. loan portfolios, suggesting that some loans may be relatively overburdened by the current standards. Collateralized loans generally pose the smallest credit risk. Commercial loans in particular appear to be under-burdened by the Basel weights, while mortgages are relatively overburdened.

Keywords: Banking, loan losses, Basel capital accord

JEL Classifications: G21, G28

Working Paper Series