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Bank Loan Underwriting Practices: Can Examiners’ Risk Assessments Contribute to Early-Warning Systems?


Table 3b.
Asset Quality Rating for Next 12 Months Prediction
Logistic Regressions
FDIC Survey Data 1998-2001
  Specification 1 Specification 2 Specification 3 Specification 4
Explanatory Variable Coefficient Estimate (standard error) Coefficient Estimate (standard error) Coefficient Estimate (standard error) Coefficient Estimate (standard error)
Intercept 3 -3.8036 *** (0.4828) -1.8211 *** (0.5321) -0.1754 (0.5850) -0.4275 (0.5579)
Intercept 2 -1.0818 ** (0.4774) 1.3132 ** (0.5309) 3.5402 *** (0.5902) 3.2439 *** (0.5621)
Equity -0.0691 *** (0.0097) -0.0553 *** (0.0099) -0.0336 *** (0.0105) -0.0349 *** (0.0105)
Allowance for loan losses 0.5808 *** (0.0949) 0.3902 *** (0.0914) 0.2182 ** (0.0950) 0.2363 ** (0.0944)
Loans past due 30-89 days 0.4357 *** (0.0392) 0.3729 *** (0.0409) 0.3411 *** (0.0433) 0.3489 *** (0.0428)
Loans past due 90 days or more 0.6863 *** (0.0929) 0.5744 *** (0.0943) 0.4142 *** (0.0967) 0.416 *** (0.0961)
Nonaccrual loans and leases 1.1558 *** (0.0703) 0.9341 *** (0.0719) 0.5490 *** (0.0743) 0.5576 *** (0.0735)
Other real estate owned 1.0509 *** (0.1256) 0.7823 *** (0.1299) 0.3725 *** (0.1306) 0.3902 *** (0.1293)
Volatile liabilities -0.0022 (0.0032) -0.0005 (0.0034) 0.0056 (0.0036) 0.0056 (0.0036)
Liquid assets -0.0076 ** (0.0041) -0.0117 *** (0.0043) -0.0105 ** (0.0047) -0.0090 * (0.0046)
Loans and securities with maturities of 5 years or more -0.0003 (0.0045) -0.0036 (0.0048) -0.0038 (0.0052) -0.0026 (0.0052)
Gross charge-offs on loans & leases 0.0231 (0.1467) -0.1038 (0.1303) -0.3803 *** (0.1284) -0.4239 *** (0.1274)
Provisions for loan & lease losses 0.4020 *** (0.1437) 0.1321 (0.1317) 0.3084 ** (0.1374) 0.3878 *** (0.1406)
Income before taxes and extraordinary items -0.4705 *** (0.0427) -0.4099 *** (0.0425) -0.2574 *** (0.0437) -0.2532 *** 0.0437
State personal-income growth, lag 1 0.0239 (0.0219) 0.0236 (0.0230) -0.0061 (0.0253) -0.0132 (0.0252)
State personal-income growth, lag 2 0.0509 ** (0.0214) 0.0509 ** (0.0226) 0.0265 (0.0247) 0.0243 (0.0245)
State personal-income growth, lag 3 0.0263 (0.0272) 0.0207 (0.0286) 0.00659 (0.0313) 0.0099 (0.0311)
State personal-income growth, lag 4 0.0377 (0.0250) 0.0379 (0.0263) 0.0414 (0.0287) 0.0433 (0.0285)
State personal-income growth, lag 5 0.0425 ** (0.0253) 0.0402 (0.0266) 0.0217 (0.0290) 0.0211 (0.0287)
Composite CAMELS dummy 1         -4.2971 *** (0.1851) -4.9213 *** (0.1603)
Composite CAMELS dummy 2         -1.8219 *** (0.1569) -2.2215 *** (0.1399)
Concentrations of credit dummy 1     -0.3837 *** (0.0948) -0.2294 ** (0.1035)    
Concentrations of credit dummy 3     -0.2432 (0.1498) -0.2084 (0.1626)    
Fail-to-adjust pricing dummy 1     -0.1620 (0.1158) -0.1309 (0.1249)    
Fail-to-adjust pricing dummy 3     0.4016 (0.2509) 0.3297 (0.2617)    
Principal reduction dummy 1     -0.3284 *** (0.0925) -0.1446 (0.1017)    
Principal reduction dummy 3     0.2088 (0.2235) 0.1252 (0.2331)    
Written policies versus practices dummy 1     -0.2130 ** (0.0941) 0.0306 (0.1039)    
Written policies versus practices dummy 3     0.1708 (0.2131) -0.0085 (0.2232)    
Current underwriting practices dummy 1     -0.2284 ** (0.1075) -0.1423 (0.1198)    
Current underwriting practices dummy 3     0.3570 (0.2480) 0.1441 (0.2543)    
Portfolio credit risk dummy 1     -0.7685 *** (0.0982) -0.1618 (0.1115)    
Portfolio credit risk dummy 3     0.9107 *** (0.2298) 0.3766 (0.2394)    
Loan administration dummy 1     -0.5139 *** (0.0954) -0.1487 (0.1071)    
Loan administration dummy 3     0.2865 (0.2059) 0.1072 (0.2155)    
Akaike Information Criteria 6,554.66   5,906.48   5,011.04   5,035.56  
Somers' D Statistic 61.1%   69.3%   78.3%   77.3%  
-2 x log likelihood, L(specification) 6,516.66   5,840.48   4,941.04   4,993.56  
Likelihhood-ratio test statistic for significance of survey variables: L(1) - L(2)           L(4) - L(3)  
Chi-square, degress of freedom, 5 percent critical value 676.18, 7, 14.07           52.52, 7, 14.07  
* indicates significance at 10% level, ** indicates signifcance at 5% level and *** indicates significance at 1% level

Last Updated 01/13/2004 Questions, Suggestions & Requests