Non-Performing Loans: Logit Model Applications

Abstract

Within bank activities, which is normally defined as the joint exercise of savings collection and credit supply risk-taking is physiological, as for a lot of human activities. Among risks related to credit inter-mediation, credit risk assumes particular importance. It is most simply defined as the potential that a bank borrower or counter party fail to fulfill correctly at maturity the pecuniary obligations assumed as principal and interest. Whenever this happens, a loan is non-performing. Among the main risk’s components, the Probability to Default and the Loss Given Default have been the subject of greater interest for research. In this paper, logit model is used to predict both the component. Financial ratios are used predicting PD. Time of recovery and presence of collateral are used to predict LGD.

Keywords: credit loss, default probability, credit risk, forecasting

JEL Classification: G01, G18, G21, G28, G32