Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 280: Duration of consumer loans and bank lending policy: dormancy versus default risk

Kenneth Carling (), Tor Jacobson () and Kasper Roszbach ()
Additional contact information
Kenneth Carling: Office of Labor Market Policy Evaluation, Postal: Box 513, SE-751 20 Uppsala, Sweden
Tor Jacobson: Research Department, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Kasper Roszbach: Dept. of Economics, Stockholm School of Economics, Postal: Box 6501, SE-113 83 STOCKHOLM, Sweden

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.

JEL-codes: C14; C41; C53; D61; D81; G21

28 pages, November 20, 1998

Note: Forthcoming in the Journal of Banking and Finance

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