The Expected Rate of Credit Losses on Banks' Loan Portfolios

Posted: 12 Feb 2015 Last revised: 18 Dec 2017

See all articles by Trevor S. Harris

Trevor S. Harris

Columbia University - Columbia Business School

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation

Doron Nissim

Columbia University - Columbia Business School

Multiple version iconThere are 3 versions of this paper

Date Written: March 2017

Abstract

Estimating expected credit losses on banks’ portfolios has long been difficult. The issue has become of increasing interest to academics and regulators, as the FASB and IASB consider new regulations for impairment of loans. This study develops a measure of the one-year-ahead expected rate of credit losses (ExpectedRCL) that combines various measures of credit risk disclosed by banks. It uses cross-sectional analyses to obtain coefficients needed to estimate each period’s measure of expected credit losses. ExpectedRCL performs substantially better than net charge-offs in predicting one-year-ahead realized credit losses and reflects nearly all the credit loss-related information in the charge-offs. ExpectedRCL also contains incremental information about one-year-ahead realized credit losses relative to the allowance and provision for loan losses and the fair value of loans. Further, ExpectedRCL is a more accurate predictor of the provision for loan losses than analyst provision forecasts and it is incrementally useful beyond other credit risk metrics in predicting bank failure up to one year ahead.

Keywords: Banks, credit losses, loans, loan loss provisions, standard setting, bank failure, earnings surprise

JEL Classification: G18, G21, M41

Suggested Citation

Harris, Trevor S. and Khan, Urooj and Nissim, Doron, The Expected Rate of Credit Losses on Banks' Loan Portfolios (March 2017). Columbia Business School Research Paper No. 15-21. Available at SSRN: https://ssrn.com/abstract=2563433 or http://dx.doi.org/10.2139/ssrn.2563433

Trevor S. Harris

Columbia University - Columbia Business School ( email )

3022 Broadway
608 Uris Hall
New York, NY 10027
United States
212-851-1802 (Phone)
212-316-9219 (Fax)

Urooj Khan (Contact Author)

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Doron Nissim

Columbia University - Columbia Business School ( email )

3022 Broadway
604 Uris Hall
New York, NY 10027
United States
212-854-4249 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
1,923
PlumX Metrics