Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/240341 
Year of Publication: 
2020
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 18/2020
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Extending a standard credit-risk model illustrates that a single factor can drive both expected losses and the extent to which they may be exceeded in extreme scenarios, ie "unexpected losses." This leads us to develop a framework for forecasting these losses jointly. In an application to quarterly US data on loan charge-offs from 1985 to 2019, we find that financial-cycle indicators - notably, the debt service ratio and credit-to-GDP gap - deliver reliable real-time forecasts, signalling turning points up to three years in advance. Provisions and capital that reflect such forecasts would help reduce the procyclicality of banks' loss-absorbing resources.
Subjects: 
Loss rate forecasts
Cyclical turning points
Expected loss provisioning
Bank capital
JEL: 
G17
G21
G28
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-358-4
Document Type: 
Working Paper

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