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


Table 4a.
Management Rating for Next 12 Months Prediction
Logistic Regressions
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 3 -2.3644 *** (0.5764) -0.6106 (0.6265) 0.6608 (0.7412) 0.3989 (0.7084)
Intercept 2 0.9232 (0.5718) 3.0220 *** (0.6273) 5.2142 *** (0.7530) 4.9206 *** (0.7194)
Equity -0.0105 (0.0113) -0.0128 (0.0117) 0.0055 (0.0121) 0.0068 (0.0119)
Allowance for loan losses 0.0395 (0.1041) 0.0421 (0.1087) -0.0948 (0.1232) -0.1117 (0.1210)
Loans past due 30-89 days 0.4284 *** (0.0521) 0.3022 *** (0.0539) 0.3125 *** (0.0613) 0.3325 *** (0.0606)
Loans past due 90 days or more 0.4731 *** (0.1125) 0.3223 *** (0.1103) 0.3077 ** (0.1263) 0.3457 *** (0.1274)
Nonaccrual loans and leases 0.6573 *** (0.0765) 0.4546 *** (0.0790) 0.2609 *** (0.0859) 0.2806 *** (0.0839)
Other real estate owned 0.7736 *** (0.1393) 0.6424 *** (0.1404) 0.3602 *** (0.1344) 0.3609 *** (0.1304)
Volatile liabilities 0.0092 ** (0.0042) 0.0127 *** (0.0044) 0.0011 (0.0050) -0.0007 (0.0050)
Liquid assets -0.0022 (0.0050) -0.0089 * (0.0053) -0.0863 (0.0062) -0.0064 (0.0061)
Loans and securities with maturities of 5 years or more -0.0055 (0.0054) -0.0128 ** (0.0056) -0.0101 (0.0066) -0.0080 (0.0066)
Gross charge-offs on loans & leases 0.1855 (0.1719) 0.0592 (0.1680) -0.1549 (0.1752) -0.1435 (0.1748)
Provisions for loan & lease losses 0.2536 (0.1597) 0.2728 * (0.1522) 0.2922 * (0.1607) 0.2776 * (0.1606)
Income before taxes and extraordinary items -0.9734 *** (0.0681) -0.0893 *** (0.0685) -0.5014 *** (0.0718) -0.5044 *** (0.0706)
State personal-income growth, lag 1 0.0197 (0.0322) 0.0222 (0.0334) -0.0166 (0.0398) -0.0161 (0.0395)
State personal-income growth, lag 2 -0.0038 (0.0343) -0.0092 (0.0356) -0.0075 (0.0422) -0.0070 (0.0421)
State personal-income growth, lag 3 0.0608 * (0.0363) 0.0392 (0.0380) 0.0659 (0.0450) 0.0682 (0.0446)
State personal-income growth, lag 4 -0.0109 (0.0272) -0.0174 (0.0282) -0.0262 (0.0330) -0.0249 (0.0329)
State personal-income growth, lag 5 -0.0628 ** (0.0262) -0.0640 ** (0.0272) -0.0474 (0.0320) -0.0431 (0.0318)
Composite CAMELS dummy 1         -5.4436 *** (0.2262) -5.6733 *** (0.2047)
Composite CAMELS dummy 2         -2.3823 *** (0.1867) -2.5035 *** (0.1704)
Concentrations of credit dummy 1     -0.1293 (0.1270) 0.0947 (0.1469)    
Concentrations of credit dummy 3     -0.0981 (0.1953) 0.0416 (0.2255)    
Fail-to-adjust pricing dummy 1     -0.2739 *** (0.1048) -0.1789 (0.1233)    
Fail-to-adjust pricing dummy 3     0.0252 (0.2050) -0.0048 (0.2329)    
Principal reduction dummy 1     -0.2824 *** (0.0977) -0.0723 (0.1158)    
Principal reduction dummy 3     0.3843 * (0.2109) 0.2479 (0.2326)    
Written policies versus practices dummy 1     -0.5265 *** (0.1126) -0.0191 (0.1320)    
Written policies versus practices dummy 3     0.1761 (0.2417) -0.1514 (0.2608)    
Current underwriting practices dummy 1     -0.1733 (0.1404) -0.0167 (0.1726)    
Current underwriting practices dummy 3     0.0054 (0.1971) -0.1639 (0.2192)    
Portfolio credit risk dummy 1     -0.2932 ** (0.1291) -0.1369 (0.1568)    
Portfolio credit risk dummy 3     0.0485 (0.1796) -0.1006 (0.2008)    
Loan administration dummy 1     -0.4674 *** (0.1194) -0.1074 (0.1476)    
Loan administration dummy 3     0.6598 *** (0.1723) 0.3053 (0.1930)    
Akaike Information Criteria 4,172.93   3,890.73   2,956.62   2,943.49  
Somers' D Statistic 54.0%   61.4%   78.6%   78.7%  
-2 x log likelihood, L(specification) 4,134.93   3,824.73   2,886.62   2,901.49  
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 310.20, 7, 14.07           14.87, 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