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Aggregate bankruptcy probabilities and their role in explaining banks’ loan losses

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  • Olga Andreeva

    (Norges Bank)

Abstract

Increased competition forces banks to narrow lending margins and at the same time relaxed lending standards worsen the pool of borrowers. To preserve sound banking system it is important task to monitor credit risk as one of the dominant factors leading to bank failures and financial vulnerability. Norwegian banks traditionally have a large share of loans to nonfinancial enterprises in their investment portfolios, and we focus on risk related to loans provided to limited liability enterprises. By combining statistics on loans to Norwegian industries and regions and bankruptcy probabilities for individual corporate borrowers, we construct a proxy reflecting risk profile of the banks’ loan portfolios. Aggregation within industries and counties provides a bank-level panel of risk indicators, which are used to estimate banks’ loan losses during the period 1988 – 2001. Constructed aggregate bankruptcy probabilities prove to be meaningful measures, which explain loan losses if we control for the macroeconomic and bank specific factors. JEL Classification: G21, C81

Suggested Citation

  • Olga Andreeva, 2004. "Aggregate bankruptcy probabilities and their role in explaining banks’ loan losses," Working Paper 2004/02, Norges Bank.
    • Handle: RePEc:bno:worpap:2004_02
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    References listed on IDEAS

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    Cited by:

    1. Adam Głogowski, 2008. "Macroeconomic determinants of Polish banks’ loan losses – results of a panel data study," NBP Working Papers 53, Narodowy Bank Polski.
    2. Mr. Rupert D Worrell, 2004. "Quantitative Assessment of the Financial Sector: An Integrated Approach," IMF Working Papers 2004/153, International Monetary Fund.
    3. Henrik Andersen, 2009. "Norwegian banks in a recession: Procyclical implications of Basel II," Working Paper 2009/04, Norges Bank.
    4. Khemraj, Tarron & Pasha, Sukrishnalall, 2009. "The determinants of non-performing loans: an econometric case study of Guyana," MPRA Paper 53128, University Library of Munich, Germany.

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    More about this item

    Keywords

    Bank losses; bankruptcy probabilities; aggregation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access

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