Cyclicality in Losses on Bank Loans

Tinbergen Institute Discussion Paper 15-050/III

68 Pages Posted: 5 May 2015 Last revised: 7 Oct 2017

See all articles by Bart Keijsers

Bart Keijsers

University of Amsterdam - Amsterdam School of Economics (ASE)

Bart F. Diris

Erasmus University Rotterdam (EUR) - Department of Econometrics; Netspar

Erik Kole

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM; Tinbergen Institute

Date Written: September 1, 2017

Abstract

Based on unique data we show that macro variables, the default rate and loss given default of bank loans share common cyclical components. The innovation in our model is the distinction between loans with either severe or mild losses. The variation in the proportion of these two types drives the cyclic behavior of the loss given default, and constitutes the links with the default rate and macro variables. These links vary according to loan and borrower characteristics. During downturns, the proportion of defaults with severe losses increases, but the distribution of losses conditional on their being mild or severe does not change. Though loans are monitored more closely than bonds and are more senior, the cyclical variation in their losses resembles those for bonds, albeit around a lower average level. This variation leads to an increase in the capital reserves required for loan portfolios.

Keywords: Loss-given-default, default rates, credit risk, capital requirements, dynamic factor models

JEL Classification: C32, C58, G21, G33

Suggested Citation

Keijsers, Bart and Diris, Bart Franciscus and Diris, Bart Franciscus and Kole, Erik, Cyclicality in Losses on Bank Loans (September 1, 2017). Tinbergen Institute Discussion Paper 15-050/III, Available at SSRN: https://ssrn.com/abstract=2602293 or http://dx.doi.org/10.2139/ssrn.2602293

Bart Keijsers (Contact Author)

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
Amsterdam, North Holland 1018 WB
Netherlands

Bart Franciscus Diris

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Erik Kole

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 12 58 (Phone)

HOME PAGE: http://people.few.eur.nl/kole

ERIM

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

HOME PAGE: http://people.few.eur.nl/kole

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
238
Abstract Views
1,383
rank
164,072
PlumX Metrics