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


Table 4b
Management 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 -3.2464 *** (0.4409) -1.4971 *** (0.4796) -0.1521 (0.5744) -0.3912 (0.5454)
Intercept 2 -0.0023 (0.4362) 2.2018 *** (0.4799) 4.5996 *** (0.5809) 4.2996 *** (0.5507)
Equity -0.0470 *** (0.0085) -0.0421 *** (0.0087) -0.0303 *** (0.0102) -0.0303 *** (0.0100)
Allowance for loan losses 0.1169 (0.0856) 0.0022 (0.0872) -0.0820 (0.1026) -0.0464 (0.1005)
Loans past due 30-89 days 0.4165 *** (0.0390) 0.3274 *** (0.0411) 0.2871 *** (0.0468) 0.2963 *** (0.0461)
Loans past due 90 days or more 0.6349 *** (0.0893) 0.4871 *** (0.0924) 0.5262 *** (0.1032) 0.5695 *** (0.1022)
Nonaccrual loans and leases 0.7168 *** (0.0607) 0.5006 *** (0.0640) 0.3452 *** (0.0723) 0.3774 *** (0.0700)
Other real estate owned 0.7367 *** (0.1160) 0.5391 *** (0.1218) 0.2836 ** (0.1292) 0.3064 ** (0.1279)
Volatile liabilities 0.0065 ** (0.0030) 0.0094 *** (0.0031) 0.0070 * (0.0036) 0.0059 (0.0036)
Liquid assets 0.0038 (0.0037) 0.0020 (0.0039) -0.0001 (0.0046) -0.0001 (0.0045)
Loans and securities with maturities of 5 years or more 0.0013 (0.0041) -0.0019 (0.0043) -0.0027 (0.0051) -0.0021 (0.0050)
Gross charge-offs on loans & leases -0.1387 (0.1387) -0.2191 * (0.1257) -0.3369 ** (0.1446) -0.3088 ** (0.1399)
Provisions for loan & lease losses 0.4143 *** (0.1260) 0.3260 ** (0.1296) 0.3896 *** (0.1394) 0.3672 *** (0.1382)
Income before taxes and extraordinary items -0.9127 *** (0.0424) -0.8680 *** (0.0441) -0.4569 *** (0.0478) -0.4427 *** (0.0473)
State personal-income growth, lag 1 0.0776 *** (0.0208) 0.0884 *** (0.0216) 0.0491 * (0.0258) 0.0416 (0.0256)
State personal-income growth, lag 2 0.0923 *** (0.0204) 0.1054 *** (0.0212) 0.0917 *** (0.0254) 0.0843 *** (0.0252)
State personal-income growth, lag 3 -0.0117 (0.0257) -0.0236 (0.0268) -0.0258 (0.0320) -0.0178 (0.0317)
State personal-income growth, lag 4 -0.0101 (0.0236) -0.0228 (0.0245) -0.0145 (0.0292) -0.0097 (0.0290)
State personal-income growth, lag 5 0.0290 (0.0238) 0.0230 (0.0248) 0.0460 (0.0296) 0.0492 * (0.0293)
Composite CAMELS dummy 1         -5.8093 *** (0.1688) -6.1199 *** (0.1536)
Composite CAMELS dummy 2         -2.6227 *** (0.1343) -2.8071 *** (0.1225)/td>
Concentrations of credit dummy 1     -0.3316 *** (0.0925) -0.1929 * (0.1100)    
Concentrations of credit dummy 3     -0.0734 (0.1462) 0.0121 (0.1709)    
Fail-to-adjust pricing dummy 1     -0.0299 (0.1151) 0.0613 (0.1322)    
Fail-to-adjust pricing dummy 3     0.8753 *** (0.2539) 0.8527 *** (0.2794)    
Principal reduction dummy 1     -0.3406 *** (0.0924) -0.1581 (0.1071)    
Principal reduction dummy 3     -0.1008 (0.2186) -0.1759 (0.2381)    
Written policies versus practices dummy 1     -0.3648 *** (0.0944) 0.1044 (0.1102)    
Written policies versus practices dummy 3     0.2319 (0.2120) 0.1525 (0.2305)    
Current underwriting practices dummy 1     -0.1143 (0.1079) 0.0718 (0.1267)    
Current underwriting practices dummy 3     0.4949 ** (0.2475) -0.1799 (0.2636)    
Portfolio credit risk dummy 1     -0.3131 *** (0.0990) -0.1405 (0.1167)    
Portfolio credit risk dummy 3     0.0307 (0.2242) -0.1769 (0.2407)    
Loan administration dummy 1     -0.8780 *** (0.0965) -0.3749 *** (0.1132)    
Loan administration dummy 3     0.6612 *** (0.2091) 0.4272 * (0.2305)    
Akaike Information Criteria 7,156.96   6,551.42   4,824.15   4,846.22  
Somers' D Statistic 56.2%   64.7%   81.3%   80.8%  
-2 x log likelihood, L(specification) 7,118.96   6,485.42   4,754.15   4,804.22  
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 633.54, 7, 14.07           50.07, 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