Are Banks' Internal Risk Parameters Consistent? Evidence from Syndicated Loans
49 Pages Posted: 1 Sep 2012 Last revised: 18 Jun 2014
Date Written: June 16, 2014
Syndicated loans provide an exceptional opportunity to study differences in banks’ approaches to measuring risk because many of these loans are held by more than one bank. We study differences in banks’ estimates of risk parameters used to calculate regulatory capital requirements for syndicated loans. Using internal data from nine large U.S. banks, we find significant dispersion in the probability of default (PD) and loss given default (LGD) assigned by different banks to the same loans. Banks’ PDs differ substantially, but only a few set PDs systematically higher or lower than others in a manner that is statistically significant. However, many banks’ estimates of LGD differ from others in a systemic manner that is both statistically and economically significant. The differences in LGDs cause large differences in Basel II minimum regulatory capital. In addition, we find a negative relation between banks’ LGDs and their loan shares, suggesting that differences in risk parameters affect bank credit supply.
Keywords: Probability of Default, Loss Given Default, Bank Capital, Syndicated Loan
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation