Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210867
Authors: 
Gaffney, Edward
McCann, Fergal
Year of Publication: 
2019
Series/Report no.: 
ESRB Working Paper Series 92
Abstract: 
Banks mustmake forward-looking provisions for loan losses undernewinternational accounting standards introduced in 2018. In Europe, banks will assign performing exposures to a new "Stage 2" category with a higher provisioning penalty, if they have experienced significant increase in credit risk (SICR).We use a loan-level credit risk model and Irish residential mortgage panel data to assign performing loans into the appropriate stage. Using this technique, we characterise approximately 30 per cent of the performing Irish mortgage portfolio at end-2015 as Stage 2.We then calculate backward-looking, static estimations of Stage 2 mortgages between 2008 and 2015. This exercise suggests that loan stage assignment can be highly pro-cyclical. The share of Stage 2 among performing mortgages rises during the economic downturn to peak in 2013, after which large transitions are assigned from Stage 2 into lowerrisk performing loans, as the economy improves.
Subjects: 
mortgage defaults
credit risk
stress testing
loan provisioning
JEL: 
G21
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-079-5
Document Type: 
Working Paper

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