The cumulative additional interest from LIBOR during the crisis is estimated to be between 1% to 2% of the notional amount of outstanding loans, depending on the tenor and type of SOFR rate used. The amount of LIBOR business loans owned by banks could have been as high as about 2trn, and the overall additional interest income banks received thanks to LIBOR could have been as high as 30bn dollars. The analysis also shows that a compounded SOFR reduces insurance relative to a term SOFR.
{"title":"Interest Received by Banks During the Financial Crisis: LIBOR vs Hypothetical SOFR Loans","authors":"Urban Jermann","doi":"10.2139/ssrn.3624908","DOIUrl":"https://doi.org/10.2139/ssrn.3624908","url":null,"abstract":"The cumulative additional interest from LIBOR during the crisis is estimated to be between 1% to 2% of the notional amount of outstanding loans, depending on the tenor and type of SOFR rate used. The amount of LIBOR business loans owned by banks could have been as high as about 2trn, and the overall additional interest income banks received thanks to LIBOR could have been as high as 30bn dollars. The analysis also shows that a compounded SOFR reduces insurance relative to a term SOFR.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"13 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-06-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75424564","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We present a model of banking with adverse selection and public guarantees extended to state-owned lenders. We find that while these guarantees induce the banking sector to lend to a larger proportion of firms with positive value, this occurs as a result of a reduction in prudential incentives to screen borrowers by state-owned banks which results in credit supply at a less than actuarially fair price. When the subsidy is tied to evergreening of non-performing loans as opposed to recapitalization post prompt loss recognition, it generates excessive credit allocation to low-productivity, legacy projects at the expense of higher-productivity firms. In the aggregate, this decreases investment, productivity growth and output while increasing financial stability risk. We apply our theoretical predictions to explain the coincidence of rising bank vulnerability and the investment slowdown in India over the last decade.
{"title":"Government Subsidies, Credit Allocation and the Investment Cycle","authors":"J. Surti, E. D'souza","doi":"10.2139/ssrn.3622947","DOIUrl":"https://doi.org/10.2139/ssrn.3622947","url":null,"abstract":"We present a model of banking with adverse selection and public guarantees extended to state-owned lenders. We find that while these guarantees induce the banking sector to lend to a larger proportion of firms with positive value, this occurs as a result of a reduction in prudential incentives to screen borrowers by state-owned banks which results in credit supply at a less than actuarially fair price. When the subsidy is tied to evergreening of non-performing loans as opposed to recapitalization post prompt loss recognition, it generates excessive credit allocation to low-productivity, legacy projects at the expense of higher-productivity firms. In the aggregate, this decreases investment, productivity growth and output while increasing financial stability risk. We apply our theoretical predictions to explain the coincidence of rising bank vulnerability and the investment slowdown in India over the last decade.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"22 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-06-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80042066","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Arabic Abstract: تعتبر المشاريع الصغيرة أحد أهم دعائم الدول النامية لأنها توفر فرص عمل للعديد من المواطنين وتعزز روح الإبتكار لديهم وتحد من ظاهرة البطالة وتستثمر الموارد المحلية المتاحة بالإضافة الى أنها تزود الصناعات الكبيرة بالمواد الأولية من خلال منتجاتها. يعتبر تمويل المشاريع الصناعية الصغيرة من أهم العوائق في تطوير هذا القطاع ولذلك تهدف هذه الورقة البحثية الى مناقشة أهم أساليب تمويل هذه المشاريع وأكثرها كفاءة والتي من شأنها دعم المشاريع الصناعية في محافظة نينوى من أجل النهوض بواقع القطاع الصناعي كما يستعرض الباحثان أهم التجارب الدولية والأقليمية في هذا المجال مع محاولة تكييفها لتتوافق مع الوضع السياسي والإقتصادي لمحافظة نينوى. توصل الباحثان الى عدة نتائج كان من أهمها إن تطبيق تمويل المشاريع الصناعية الصغيرة في المصارف الإسلامية من شأنه زيادة أرباح المصارف الإسلامية من خلال تقليل مخاطر التمويل وذلك بتجزئته و بالتالي تقليل الخسائر المتوقعة وزيادة فرص الإستثمار التمويلي وإدخال عوائد مالية للإقتصاد العراقي الذي يعاني من عجز نتيجة إنخفاض أسعار النفط دوليا وبشكل أساس دعم القطاع الصناعي في محافظة نينوى. يوصي الباحثان بضرورة دعم الحكومة للمشاريع الصناعية الصغيرة لما لها من آثار إقتصادية وإجتماعية كبيرة على النسيج الإجتماعي في محافظة نينوى من خلال تشجيع المصارف التجارية والإسلامية على تمويل المشاريع الصناعية الصغيرة وفق سياقات نظامية. English Abstract: Small projects are considered one of the most important pillars of developing countries because they provide employment opportunities for many citizens and enhance their innovation spirit and reduce unemployment and invest available local resources in addition to providing large industries with raw materials through their products. Financing small industrial projects is considered one of the most important obstacles in the development of this sector. Therefore, this research paper aims to discuss the most important and most efficient methods of financing these projects, which would support industrial projects in Nineveh Governorate in order to advance the reality of the industrial sector. The researchers also review the most important international and regional experiences in this. The field with an attempt to adapt it to suit the political and economic situation in Nineveh Governorate. The researchers reached several results, the most important of which was that the application of financing small industrial projects in Islamic banks would increase the profits of Islamic banks by reducing financing risks by splitting it and thus reducing expected losses and increasing financing investment opportunities and introducing financial returns to the Iraqi economy that suffers from a deficit as a result of a decrease International oil prices, mainly to support the industrial sector in Nineveh Governorate. The researchers recommend that the government should support small industrial projects because of their significant economic and social impacts on the social fabric in Nineveh Governorate by encouraging commercial and Islamic banks to finance small industrial projects according to systematic co
{"title":"إستخدام أدوات الإقتصاد الإسلامي في دعم المشاريع الصناعية الصغيرة في محافظة نينوى (Using Islamic Economics Tools to Support Small Industrial Projects in Nineveh Governorate)","authors":"Thabit H. Thabit","doi":"10.2139/ssrn.3619515","DOIUrl":"https://doi.org/10.2139/ssrn.3619515","url":null,"abstract":"Arabic Abstract: تعتبر المشاريع الصغيرة أحد أهم دعائم الدول النامية لأنها توفر فرص عمل للعديد من المواطنين وتعزز روح الإبتكار لديهم وتحد من ظاهرة البطالة وتستثمر الموارد المحلية المتاحة بالإضافة الى أنها تزود الصناعات الكبيرة بالمواد الأولية من خلال منتجاتها. \u0000يعتبر تمويل المشاريع الصناعية الصغيرة من أهم العوائق في تطوير هذا القطاع ولذلك تهدف هذه الورقة البحثية الى مناقشة أهم أساليب تمويل هذه المشاريع وأكثرها كفاءة والتي من شأنها دعم المشاريع الصناعية في محافظة نينوى من أجل النهوض بواقع القطاع الصناعي كما يستعرض الباحثان أهم التجارب الدولية والأقليمية في هذا المجال مع محاولة تكييفها لتتوافق مع الوضع السياسي والإقتصادي لمحافظة نينوى. \u0000توصل الباحثان الى عدة نتائج كان من أهمها إن تطبيق تمويل المشاريع الصناعية الصغيرة في المصارف الإسلامية من شأنه زيادة أرباح المصارف الإسلامية من خلال تقليل مخاطر التمويل وذلك بتجزئته و بالتالي تقليل الخسائر المتوقعة وزيادة فرص الإستثمار التمويلي وإدخال عوائد مالية للإقتصاد العراقي الذي يعاني من عجز نتيجة إنخفاض أسعار النفط دوليا وبشكل أساس دعم القطاع الصناعي في محافظة نينوى. \u0000يوصي الباحثان بضرورة دعم الحكومة للمشاريع الصناعية الصغيرة لما لها من آثار إقتصادية وإجتماعية كبيرة على النسيج الإجتماعي في محافظة نينوى من خلال تشجيع المصارف التجارية والإسلامية على تمويل المشاريع الصناعية الصغيرة وفق سياقات نظامية. \u0000 \u0000English Abstract: Small projects are considered one of the most important pillars of developing countries because they provide employment opportunities for many citizens and enhance their innovation spirit and reduce unemployment and invest available local resources in addition to providing large industries with raw materials through their products. \u0000 \u0000Financing small industrial projects is considered one of the most important obstacles in the development of this sector. Therefore, this research paper aims to discuss the most important and most efficient methods of financing these projects, which would support industrial projects in Nineveh Governorate in order to advance the reality of the industrial sector. The researchers also review the most important international and regional experiences in this. The field with an attempt to adapt it to suit the political and economic situation in Nineveh Governorate. \u0000 \u0000The researchers reached several results, the most important of which was that the application of financing small industrial projects in Islamic banks would increase the profits of Islamic banks by reducing financing risks by splitting it and thus reducing expected losses and increasing financing investment opportunities and introducing financial returns to the Iraqi economy that suffers from a deficit as a result of a decrease International oil prices, mainly to support the industrial sector in Nineveh Governorate. \u0000 \u0000The researchers recommend that the government should support small industrial projects because of their significant economic and social impacts on the social fabric in Nineveh Governorate by encouraging commercial and Islamic banks to finance small industrial projects according to systematic co","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-06-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90900095","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study provides estimates of the impact of increased access to home mortgage credit on local crime rates and uses national home mortgage loan origination volume as a shift-share instrument for local home mortgage loan origination volume. The focus of the study is San Diego County from 2007-Q1 to 2013-Q1. The regression estimates indicate that increased access to home mortgage loans during this time period had a statistically significant negative impact on local crime rates: the baseline specification suggests that a ten percentage point increase in the growth in home mortgage loan originations decreases the growth in total crime incidents by approximately 2.75 percentage points. This finding is robust to different model specifications.
{"title":"Does Increased Access to Home Mortgage Money Decrease Local Crime Rates? Evidence from San Diego County","authors":"W. Bunting","doi":"10.2139/ssrn.2832589","DOIUrl":"https://doi.org/10.2139/ssrn.2832589","url":null,"abstract":"<br>This study provides estimates of the impact of increased access to home mortgage credit on local crime rates and uses national home mortgage loan origination volume as a shift-share instrument for local home mortgage loan origination volume. The focus of the study is San Diego County from 2007-Q1 to 2013-Q1. The regression estimates indicate that increased access to home mortgage loans during this time period had a statistically significant negative impact on local crime rates: the baseline specification suggests that a ten percentage point increase in the growth in home mortgage loan originations decreases the growth in total crime incidents by approximately 2.75 percentage points. This finding is robust to different model specifications.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88779296","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Analyzing unique data on loan applications by individuals who are majority owners of small firms, we detail how a bank’s credit decisions affect their future income. We use the bank’s cutoff rule, which is based on the applicants’ credit scores, as the discontinuous locus providing exogenous variation in the decision to grant loans. We show that application acceptance increases recipients’ income five years later by more than 10 percent compared to denied applicants. This effect is mostly driven by the use of borrowed funds to undertake investments, and is stronger when individuals are more credit-constrained.
{"title":"Credit, Income and Inequality","authors":"M. Delis, Fulvia Fringuellotti, S. Ongena","doi":"10.2139/ssrn.3631252","DOIUrl":"https://doi.org/10.2139/ssrn.3631252","url":null,"abstract":"Analyzing unique data on loan applications by individuals who are majority owners of small firms, we detail how a bank’s credit decisions affect their future income. We use the bank’s cutoff rule, which is based on the applicants’ credit scores, as the discontinuous locus providing exogenous variation in the decision to grant loans. We show that application acceptance increases recipients’ income five years later by more than 10 percent compared to denied applicants. This effect is mostly driven by the use of borrowed funds to undertake investments, and is stronger when individuals are more credit-constrained.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"33 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81243631","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study how bank equity values affect loan supply. We exploit granular balance sheet information on euro area banks matched with financial market data. We address endogeneity concerns by instrumenting bank stock prices with a shifter derived from each bank stock price's sensitivity to non-financial corporations' equity values. Our results indicate that, other things equal, rises in bank stock prices cause increases in corporate and household lending, and in bank capitalization. We interpret these results as due to bank managers reading the rises in their bank's stock price as reductions in their bank's cost of equity
{"title":"Bank Equity Value And Loan Supply","authors":"M. Girotti, G. Horny","doi":"10.2139/ssrn.3530844","DOIUrl":"https://doi.org/10.2139/ssrn.3530844","url":null,"abstract":"We study how bank equity values affect loan supply. We exploit granular balance sheet information on euro area banks matched with financial market data. We address endogeneity concerns by instrumenting bank stock prices with a shifter derived from each bank stock price's sensitivity to non-financial corporations' equity values. Our results indicate that, other things equal, rises in bank stock prices cause increases in corporate and household lending, and in bank capitalization. We interpret these results as due to bank managers reading the rises in their bank's stock price as reductions in their bank's cost of equity","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"13 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86443943","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A. Andersen, A. Jensen, Niels Johannesen, C. Kreiner, Søren Leth-Petersen, Adam Sheridan
How much and through which channels do households self-insure against job loss? Combining data from a large bank and from government sources, we quantify a broad range of responses to job loss in a unified empirical framework. Cumulated over a two-year period, households reduce spending by 30 percent of their income loss. They mainly self-insure through adjustments of liquid balances, which account for 50 percent of the income loss. Other channels—spousal labor supply, private transfers, home equity extraction, mortgage refinancing, and consumer credit—contribute less to self-insurance. Both overall self-insurance and the channels vary with household characteristics in intuitive ways. (JEL D12, G21, G51, J64, J65)
{"title":"How Do Households Respond to Job Loss? Lessons from Multiple High-Frequency Data Sets","authors":"A. Andersen, A. Jensen, Niels Johannesen, C. Kreiner, Søren Leth-Petersen, Adam Sheridan","doi":"10.2139/ssrn.3578410","DOIUrl":"https://doi.org/10.2139/ssrn.3578410","url":null,"abstract":"How much and through which channels do households self-insure against job loss? Combining data from a large bank and from government sources, we quantify a broad range of responses to job loss in a unified empirical framework. Cumulated over a two-year period, households reduce spending by 30 percent of their income loss. They mainly self-insure through adjustments of liquid balances, which account for 50 percent of the income loss. Other channels—spousal labor supply, private transfers, home equity extraction, mortgage refinancing, and consumer credit—contribute less to self-insurance. Both overall self-insurance and the channels vary with household characteristics in intuitive ways. (JEL D12, G21, G51, J64, J65)","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"6 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-04-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87080715","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The article analyses the law related to One Time Settlement "OTS." The article discusses the law that OTS cannot be claimed as a matter of right from the bank. A court of law cannot direct OTS because that would mean the court is directing rescheduling of a loan. Where a creditor is enforcing its liability upon the debtor, the debtor has no legal right to claim that the claim be settled on favourable terms proposed by debtor whereby the claim of the creditor is reduced. This rule is discussed and analysed in light of cases: D.K. Gupta & Anr V/s Oriental Bank of Commerce, 127 (2006) DLT 488; M.M. Accessories V/s U.P. Financial Corporation, 2002 (46) ALR 261; Haryana Steel & Alloys Ltd. V/s IFCI Ltd. & Anr, LPA No. 1947/ 2006.
The article clarifies the difference between OTS, which is governed by directions/ circulars issued by the RBI and out of court settlement which is governed by Section 89 of the Code of Civil Procedure, 1908.
{"title":"'OTS' Cannot Be Claimed as a Matter of Right by the Borrower From the Bank","authors":"Pallavi Gupta, Shivam Goel","doi":"10.2139/ssrn.3565323","DOIUrl":"https://doi.org/10.2139/ssrn.3565323","url":null,"abstract":"The article analyses the law related to One Time Settlement \"OTS.\" The article discusses the law that OTS cannot be claimed as a matter of right from the bank. A court of law cannot direct OTS because that would mean the court is directing rescheduling of a loan. Where a creditor is enforcing its liability upon the debtor, the debtor has no legal right to claim that the claim be settled on favourable terms proposed by debtor whereby the claim of the creditor is reduced. This rule is discussed and analysed in light of cases: D.K. Gupta & Anr V/s Oriental Bank of Commerce, 127 (2006) DLT 488; M.M. Accessories V/s U.P. Financial Corporation, 2002 (46) ALR 261; Haryana Steel & Alloys Ltd. V/s IFCI Ltd. & Anr, LPA No. 1947/ 2006.<br><br>The article clarifies the difference between OTS, which is governed by directions/ circulars issued by the RBI and out of court settlement which is governed by Section 89 of the Code of Civil Procedure, 1908.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"2 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80717826","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper develops a dynamic general equilibrium model on the interaction of bankers' asset and liability management with liquidity concerns. Bankers screen real production projects and issue deposits. Liquidity concerns stem from endogenized early withdrawals of deposits. To fulfill early withdrawals, bankers sell assets in a secondary market. The paper argues that ex post asymmetric information in the secondary market distorts bankers' incentive in screening ex ante, as bad assets are easier to sell and generate liquidity benefits. Moreover, the general equilibrium feature of the model implies that exogenous aggregate productivity shocks are amplified and booms may lead to busts.
{"title":"The Interaction of Bankers' Asset and Liability Management with Liquidity Concerns","authors":"Yiran Fan","doi":"10.2139/ssrn.3561614","DOIUrl":"https://doi.org/10.2139/ssrn.3561614","url":null,"abstract":"This paper develops a dynamic general equilibrium model on the interaction of bankers' asset and liability management with liquidity concerns. Bankers screen real production projects and issue deposits. Liquidity concerns stem from endogenized early withdrawals of deposits. To fulfill early withdrawals, bankers sell assets in a secondary market. The paper argues that ex post asymmetric information in the secondary market distorts bankers' incentive in screening ex ante, as bad assets are easier to sell and generate liquidity benefits. Moreover, the general equilibrium feature of the model implies that exogenous aggregate productivity shocks are amplified and booms may lead to busts.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-03-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78947801","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study and model the determinants of exposure at default (EAD) for large U.S. construction and land development loans from 2010 to 2017. EAD is an important component of credit risk, and commercial real estate (CRE) construction loans are more risky than income producing loans. This is the first study modeling the EAD of construction loans. The underlying EAD data come from a large, confidential supervisory dataset used in the U.S. Federal Reserve’s annual Comprehensive Capital Assessment Review (CCAR) stress tests. EAD reflects the relative bargaining ability and information sets of banks and obligors. We construct OLS and Tobit regression models, as well as several other machine-learning models, of EAD conversion measures, using a four-quarter horizon. The popular LEQ and CCF conversion measure is unstable, so we focus on EADF and AUF measures. Property type, the lagged utilization rate and loan size are important drivers of EAD. Changing local and national economic conditions also matter, so EAD is sensitive to macro-economic conditions. Even though default and EAD risk are negatively correlated, a conservative assumption is that all undrawn construction commitments will be fully drawn in default.
{"title":"Understanding the Exposure at Default Risk of Commercial Real Estate Construction and Land Development Loans","authors":"Shan Luo, A. Murphy","doi":"10.24149/wp2007","DOIUrl":"https://doi.org/10.24149/wp2007","url":null,"abstract":"We study and model the determinants of exposure at default (EAD) for large U.S. construction and land development loans from 2010 to 2017. EAD is an important component of credit risk, and commercial real estate (CRE) construction loans are more risky than income producing loans. This is the first study modeling the EAD of construction loans. The underlying EAD data come from a large, confidential supervisory dataset used in the U.S. Federal Reserve’s annual Comprehensive Capital Assessment Review (CCAR) stress tests. EAD reflects the relative bargaining ability and information sets of banks and obligors. We construct OLS and Tobit regression models, as well as several other machine-learning models, of EAD conversion measures, using a four-quarter horizon. The popular LEQ and CCF conversion measure is unstable, so we focus on EADF and AUF measures. Property type, the lagged utilization rate and loan size are important drivers of EAD. Changing local and national economic conditions also matter, so EAD is sensitive to macro-economic conditions. Even though default and EAD risk are negatively correlated, a conservative assumption is that all undrawn construction commitments will be fully drawn in default.","PeriodicalId":11689,"journal":{"name":"ERN: Commercial Banks (Topic)","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-03-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86738900","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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