Loan Portfolio Composition Research Articles

Institutions and Bank Behavior: Legal Environment, Legal Perception, and the Composition of Bank Lending

This paper explores how the legal environment affects bank behavior in 20 transition economies. Based on a newly constructed data set we find that banks’ loan portfolio composition depends on the legal environment. If banks operate in a well‐functioning legal environment they lend relatively more to SMEs and provide more mortgages. On the other hand, banks lend more to large enterprises and to the government if the legal system is unsound. As a transmission channel we identify the banks’ willingness to accept collateral which depends on the bankers’ perceptions of the prevailing laws regarding collateral.

Why are interest spreads so high in Uganda?

Using international comparisons and a unique bank-level dataset on the Ugandan banking system over the period 1999 to 2005, we explore the factors behind consistently high interest rate spreads and margins. International comparisons show that the small size of Ugandan banks, persistently high T-Bill rates and institutional deficiencies explain large proportions of the high Ugandan interest rate margins. The Ugandan bank panel confirms the importance of macroeconomic factors, such as high inflation, high T-Bill rates and exchange rate appreciation. There is also evidence for the small market place and high costs of doing business explaining persistently high spreads and margins; smaller banks and banks targeting the low end of the market incur higher costs and therefore higher margins. Spreads and margins also vary significantly with the sectoral loan portfolio composition of banks, while there is little evidence for foreign bank entry, privatization or changes in market structure explaining variation in spreads or margins over time.

What Determines the Composition of Banks' Loan Portfolios? Evidence from Transition Countries

This paper explores how bank characteristics and the institutional environment influence the composition of banks’ loan portfolios. We use a new and unique data set based on the EBRD Banking Environment and Performance Survey (BEPS), which was conducted for 220 banks in 20 transition countries. We show that bank ownership, bank size, and legal creditor protection are important determinants of the composition of banks’ loan portfolios. In particular, we find that foreign banks play an active role in mortgage lending. Moreover, banks that perceive pledge and mortgage laws to be of high quality choose to focus more on mortgage lending.

Institutions and Bank Behavior

This paper explores how the legal environment affects bank behavior in 20 transition economies. Based on a newly constructed data set we find that banks loan portfolio composition depends on the legal environment. If banks operate in a well-functioning legal environment they lend relatively more to SMEs and provide more mortgages. On the other hand, banks lend more to large enterprises and to the government if the legal system is unsound. As a transmission channel we identify the banks willingness to accept collateral which depends on the bankers perceptions of the prevailing laws regarding collateral.

Institutional uncertainty and the maturity of international loans

This paper shows that non-economic uncertainty in foreign countries contributes to a bias toward short-term maturity in international lending. Frequent government changes and weak institutions explain why some countries find it difficult to obtain long-term financing. Debt maturity is also explained by the level of economic and financial development of a country, the composition of loan portfolios in terms of the type of borrowers, and debt restructuring programs, among other variables. The results are obtained using data on international lending by three groups of U.S. banks: large, medium-sized, and small. Small banks shorten the maturity of their international loans in response to uncertainty to a greater extent compared to large banks.

Measuring Credit Risk of a Bank's Corporate Loan Portfolio Using Advanced Internal Ratings Base Approach

The use of technical and advanced approaches in the measurement of credit risk of banks' portfolios has nowadays become a very hot issue. The most recent technical report issued by the Basel Committee in May 2003 has concentrated heavily on the measurement of credit risk using either foundation or advanced Internal Ratings Base (IRB) approaches. This empirical research study attempts to measure credit risk of a bank's corporate loan portfolio, including firms from 10 different Turkish sectors. The monthly observations of the total amount of corporate loans and the total amount of corporate loans at default across various sectors are downloaded from the web page of Central Bank of Turkey (CBT) in a period of 1999-2002. This period covers 47 monthly observations since CBT has captured sectoral corporate loans beginning of 1999. Therefore, the observed sectoral default rates are needed to be simulated to obtain a nicely shaped distribution. Monte Carlo simulation is applied for 1,000 times. Based on the simulated default rates, the expected sectoral default rates are computed. Next, a credit quality rating scale is fitted into sectoral default rates distributions. Finally, the sectoral weights in the whole loan portfolio are multiplied by the expected sectoral default rates matrix, considering cross-sectoral correlations to get the total amount of the bank's credit risk and capital requirement. It is assumed that sectoral monthly default rates are a good representative of the default risk of a sample bank's corporate loan portfolio since no publicly available data on any particular bank's corporate loan portfolio composition exists. Nevertheless, this research may be a good application for measuring the credit risk of banks' corporate loan portfolios using advanced IRB approach.

Competition under credit rationing: theory and evidence from rural China

We present a duopoly model of financial competition to describe the conditions under which competition leads to greater bank effort when repressed financial systems ration credit. The model features an entrant that freely sets its interest rate, and an incumbent that must charge a rate below that which is market clearing. Both players may exert costly effort to inform themselves about borrower types. Using data on rural financial institutions in China, we test empirically the effects of competition on deposit growth, loan portfolio composition, repayment rates, and other effort measures, finding positive effects of competition on effort and financial performance.

German Banks' Loan Portfolio Composition: Market-Orientation vs. Specialisation

Theoretical studies of bank existence reveal the importance of informational asymmetries (cf., for example, Diamond(1984)). This might suggest that banks specialise their loan origination in specific industries to exploit information advantages. However, modern portfolio theory, although not directly applicable to banks, as well as the concept of herding behaviour would instead tend to imply that banks' loan portfolios should mimic the industry composition of the total loan market. Using aggregated loan data from 1970 to 2001 for 7 bank groups and up to 16 industries, we examine which of the competing hypothesises is more convincing empirically. As a new methodology, distance measures are defined to evaluate deviations of banks' portfolios from the market average. It turns out that almost all measures reveal a relatively distinct trend towards the industry composition of the market portfolio for most bank groups. However, differences in the pace as well as in the remaining deviation can be observed. It is noteworthy that only in a few industries certain bank groups remain dominant with markets shares well above average while in other industries each bank group holds a proportion according to its market share. Finally, the results shed light on the different roles central banks of the cooperative and public sectors play for diversification.

Bank Loan Portfolio Composition and the Disclosure of Loan Loss Provisions: Empirical Evidence from Malaysian Banks

This study develops a model for loan loss provision which follows the accounting practice in Malaysia. Banks are subject to generally accepted accounting principles (GAAP) in disclosing the loan loss provision. However, the expected loan losses factor should also be taken into account to counter unexpected situations. Prior studies show that banks tend to manipulate the loan loss provision through discretionary accruals for income smoothing purposes. Since the loan loss provision is important to banks' income, this study will determine factors that influence the provision. Empirical evidence state that the loan loss provision is positively related to non‐performing loans, loan loss allowance and write‐offs. Estimation results using ordinary least squares regression prove that the banks follow GAAP guidelines, whereby the loan loss provision depends on the beginning balance and the current write‐offs. In addition, the banks should also consider the expected non‐performing loans in providing loan loss provisions. In determining loan losses, the performance of each economic sector should also be considered due to different default risks.

The Effect of Bank Loan Portfolio Composition on the Market Reaction to and Anticipation of Loan Loss Provisions

We investigate how banks' loan portfolio composition affects the timeliness of loan loss provisions and, thus, the relation between security returns and such provisions. We maintain that the timeliness of loss provisions relative to other information about loan default decreases as discretion over such provisions increases, and that discretion over loss provisions varies by loan type. Bank managers have more discretion over loss provisions for large and frequently renegotiated loans, e.g., foreign and commercial loans, than for small or infrequently renegotiated loans, e.g., consumer loans. Large size and the possibility of renegotiation provide rationales for banks to provide for losses on a loan-by-loan basis rather than by statistical analysis of historical data. Using the proportion of small or infrequently renegotiated loans as a measure of the timeliness of loan loss provisions, we hypothesize and find that both the sign of the market reaction to and the strength of the market anticipation of loan loss provisions differs by this timeliness measure.'