SSE/EFI Working Paper Series in Economics and Finance
No 280:
Duration of consumer loans and bank lending policy: dormancy versus default risk
Kenneth Carling ()
, Tor Jacobson ()
and Kasper Roszbach ()
Abstract: A bank that lends money to a household faces two types of
risk. Most commonly mentioned is the risk of a default. Hardly ever
referred to is the risk of an early redemption of the loan - leading to
dormancy. We model consumer loans' transition from an active to a dormant
state and estimate a semi-parametric duration model with a data set
consisting of 4,733 individuals who were granted credit by a Swedish
lending institution between 1993 and 1995. We analyze the factors that
determine the time to maturity on a loan and investigate the model's
ability to match the maturities observed in the data. The model is used to
evaluate loan applicants by their expected durations and - profits, and to
derive the distribution of conditional expected durations and - profits for
the loan portfolio. This enables us to draw some conclusions about the
efficiency of bank lending policy.
Keywords: Bank lending policy; duration analysis; semi-parametric methods; dormancy; cost-benefit analysis.; (follow links to similar papers)
JEL-Codes: C14; C41; C53; D61; D81; G21; (follow links to similar papers)
28 pages, November 20, 1998
Forthcoming in the Journal of Banking and Finance
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