Measuring Provisions for Collateralised Retail Lending

19 Pages Posted: 1 May 2007

See all articles by Cho-Hoi Hui

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Chi-Fai Lo

The Chinese University of Hong Kong

T. C. Wong

Hong Kong Monetary Authority - Research Department

P. K. Man

Chinese University of Hong Kong - Department of Physics

Abstract

This paper develops a simple model based on an options approach to measure provisions covering expected losses of collateralised retail lending due to default. The measurement of provisions against expected losses of retail lending secured by collateral is important for improving the capital adequacy framework for banks. The numerical results based on the model show that the loan-to-value ratio, correlation between the collateral value and the probability of default of borrowers in the pool, volatility of the collateral value, mean-reverting process of the probability of default and time horizon are the important factors for measuring provisions.

Keywords: credit risk, retail lending, Basel II

JEL Classification: C60, G13, G28

Suggested Citation

Hui, Cho-Hoi and Lo, Chi-Fai and Wong, Tak-Chuen and Man, P. K., Measuring Provisions for Collateralised Retail Lending. Journal of Economics and Business, Vol. 58, pp. 343-361, 2006. Available at SSRN: https://ssrn.com/abstract=983474

Cho-Hoi Hui (Contact Author)

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

Chi-Fai Lo

The Chinese University of Hong Kong ( email )

Department of Physics
Shatin, N.T., Hong Kong
China

Tak-Chuen Wong

Hong Kong Monetary Authority - Research Department ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central,
Hong Kong
Hong Kong

P. K. Man

Chinese University of Hong Kong - Department of Physics ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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