Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/111729
Authors: 
Keijsers, Bart
Diris, Bart
Kole, Erik
Year of Publication: 
2015
Series/Report no.: 
Tinbergen Institute Discussion Paper 15-050/III
Abstract: 
Cyclicality in the losses of bank loans is important for bank risk management. Because loans have a different risk profile than bonds, evidence of cyclicality in bond losses need not apply to loans. Based on unique data we show that the default rate and loss given default of bank loans share a cyclical component, related to the business cycle. We infer this cycle by a new model that distinguishes loans with large and small losses, and links them to the default rate and macro variables. The loss distributions within the groups stay constant, but the fraction of loans with large losses increases during downturns. Our model implies substantial time-variation in banks' capital reserves, and helps predicting the losses.
Subjects: 
Loss-given-default
default rates
credit risk
capital requirements
dynamic factor models
JEL: 
C32
C58
G21
G33
Document Type: 
Working Paper

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