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


Table 6.
Total Nonperforming Assets Prediction (one year ahead)
Ordinary Least Squares Regression
FDIC Survey Data 1996-1998
  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 0.1655 *** (0.3024) 0.5447 *** (0.3201) 0.8840 *** (0.3373) 0.7424 *** (0.3181)
Nonperforming assets (t-1)  0.6842 *** (0.0145) 0.65516 *** (0.0151) 0.63065 *** (0.0160) 0.6341 *** (0.0160)
Equity (t-1)  0.0091 * (0.0043) 0.0100 * (0.0043) 0.0110 ** (0.0043) 0.0109 ** (0.0043)
Allowance for loan losses (t-1)  0.0000 ** 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 * 0.0000
Volatile liabilities (t-1)  -0.0003 *** (0.0024) -0.0004 *** (0.0023) -0.0008 *** (0.0023) -0.0006 *** (0.0023)
Liquid assets (t-1)  -0.0027 (0.0027) -0.0035 (0.0027) -0.0033 (0.0027) -0.0026 (0.0027)
Loans and securities with maturities of 5 years or more (t-1)  0.0037 (0.0029) 0.0025 (0.0029) 0.0026 (0.0029) 0.0035 (0.0029)
Gross charge-offs on loans & leases (t-1)  -0.1791 ** (0.0904) -0.2326 *** (0.0903) -0.2541 *** (0.0904) -0.2264 ** (0.0901)
Provisions for loan & lease losses (t-1)  0.3507 *** (0.0931) 0.3591 *** (0.0929) 0.3629 *** (0.0933) 0.3503 *** (0.0932)
Income before taxes and extraordinary items (t-1)  0.0402 * (0.0214) 0.0471 ** (0.0214) 0.0589 ** (0.0215) 0.0607 *** (0.0214)
State personal-income growth, lag 1 -0.0316 * (0.0154) -0.0287 * (0.0153) -0.0286 * (0.0153) -0.0301 ** (0.0153)
State personal-income growth, lag 2 0.0019 (0.0173) 0.0014 (0.0173) 0.0002 (0.0172) 0.0013 (0.0172)
State personal-income growth, lag 3 0.0101 (0.0213) 0.0067 (0.0212) 0.00727 (0.0211) 0.0076 (0.0211)
State personal-income growth, lag 4 0.0056 (0.0158) 0.0032 (0.0158) 0.0056 (0.0157) 0.0073 (0.0157)
State personal-income growth, lag 5 0.0266 * (0.0143) 0.0268 * (0.0143) 0.0290 ** (0.0143) 0.0304 ** (0.0142)
Asset component dummy 1         -0.4775 *** (0.1328) -0.6382 *** (0.1170)
Asset component dummy 2         -0.2608 ** (0.1125) -0.3422 *** (0.1130)
Survey lag (calldate - survey date)     0.0000 (0.0002) 0.0000 (0.0002)    
Concentrations of credit dummy 1     -0.1140 * (0.0630) -0.1016 (0.0628)    
Concentrations of credit dummy 3     0.0007 (0.0969) -0.0058 (0.0966)    
Fail-to-adjust pricing dummy 1     -0.0294 (0.0509) -0.0235 (0.0508)    
Fail-to-adjust pricing dummy 3     -0.1197 (0.1054) -0.1110 (0.1052)    
Principal reduction dummy 1     -0.0748 (0.0475) -0.0542 (0.0476)    
Principal reduction dummy 3     0.3781 *** (0.1060) 0.3689 *** (0.1058)    
Written policies versus practices dummy 1     -0.0139 (0.0555) -0.0035 (0.0554)    
Written policies versus practices dummy 3     0.1829 (0.1243) 0.1345 (0.1245)    
Current underwriting practices dummy 1     0.0248 (0.0688) 0.0187 (0.0685)    
Current underwriting practices dummy 3     -0.0764 (0.1039) -0.0836 (0.1035)    
Portfolio credit risk dummy 1     -0.1431 ** (0.0640) -0.0919 (0.0650)    
Portfolio credit risk dummy 3     0.1604 * (0.0962) 0.0895 (0.0983)    
Loan administration dummy 1     -0.0838 (0.0581) -0.0726 (0.0579)    
Loan administration dummy 3     -0.0851 (0.0885) -0.1405 (0.0891)    
Adjusted R Squared 56.0%   56.9%   57.3%   56.9%  
F Statistic for test that all variables are significant, 5 percent critical value 214.29
1.67
  108.07
1.46
  102.61
1.46
  194.8
1.67
 
Specifications compared for F-statistic test that all survey terms are not significant, 5 percent critical value   Spec(1) and (2)
4.47, 1.67
        Spec(3) and (4)
2.40, 1.67
 
* indicates significance at 10% level, ** indicates signifcance at 5% level and *** indicates significance at 1% level

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