Retail Loans Research Articles

Russia's Banking Sector in August 2014

Banks’ assets contracted in August due to the shrinking of basically all key types of bank assets. It is only retail accounts and deposits that showed minor positive dynamics, although the downtrend in growth rates was still in place. This also pushed down the growth in the credit portfolio. The quality of corporate loans remained stable, whereas the quality of retail loans kept deteriorating.

Russian Banks -- A Year on Since the Appointment of New Cantral Bankks Head

The Central Bank’s new management have revoked the banking license of 7% of banks which were operating last year. Additionally, the following trends in the development of the banking sector developed most visibly during the elapsed 12 months: retail market segments – retail loans and retail bank deposits – saw slowdown in growth rates; the role of state-run banks increased, especially in retail markets; banking sector’s profitability was diluted, and the scale of refinancing of banks increased to a level comparable with the crisis in 2009.

Exclusion, competition, and regulation in the retail loan market

Exclusion of borrowers from credit markets became a primary concern for regulators during the recovery from the recent recession. The paper analyzes loan-making institutions that set both interest rates and minimum credit requirements. We propose analytical measures of the degree of borrower exclusion from receiving loans. We analyze five market structures: Single lender, regulated interest rate, entry, interest rate discrimination, and highly-competitive lenders. Interest rate regulation improves total welfare relative to a single lender market. However, entry of a second lender reduces exclusion and generates higher total welfare. In the absence of fixed costs, perfect and Bertrand competition are optimal.

Credit Default and Business Cycles: An Empirical Investigation of Brazilian Retail Loans

We use microdata from the Credit Information System (SCR) of the Central Bank of Brazil to study the relationship between credit default and business cycles. In particular, we study the first part of the argument underlying the discussion about procyclicality related to the Basel II Accord: that recessions might increase credit defaults and have adverse impacts on the losses in portfolios of lender institutions. We explore both time series and cross-sectional variation in the data. Our data on the individual level are composed of retail loan transactions in two modalities—Consumer Credit and Vehicle Financing—from 2003 to 2008. Our results support the idea of a negative relationship between business cycles and credit default, but less strong than suggested in previous studies that use corporate data. We also find low and dispersed default correlations, and smaller losses in Value at Risk (VaR) experiments than those found in the literature. These results may be possibly explained by the fact that, in the retail sector, loans are given to a large number of individuals, which may help to diversify risks. O artigo usa microdados do Sistema de Informacoes de Credito (SCR) do Banco Central do Brasil para estudar a relacao entre inadimplencia de operacoes de credito e ciclo economicos. Em particular, estuda a primeira parte do argumento da discussao sobre prociclicalidade do Acordo de Basileia II:

Exclusion, Competition, and Regulation in the Retail Loan Market

Exclusion, Competition, and Regulation in the Retail Loan Market

Asset correlation of retail loans in the context of the new Basel Capital Accord

The approach to the measurement of credit risk recommended by the new Basel Capital Accord (Basel II) gives a wide choice of basic risk estimators. However, the rules for estimating asset correlations are defined in an ambiguous manner. The main aim of this paper is to verify the assumptions made by the Basel Committee on asset correlation. We thus refer to results of other researchers and present the results of research conducted based on a portfolio of automobile loans granted to individuals. We verify the hypothesis that the level of correlation established by the Basel Committee is overestimated for retail loans and show that, for the auto portfolios analyzed, the real level of correlation is much lower than that recommended in the new Basel Capital Accord. The results and their practical implications are presented together with a review of other studies.

Mortgage Brokers, Origination Fees, Price Transparency and Competition

This article examines the dynamics between mortgage broker competition, origination fees and price transparency. A reverse first‐price sealed‐bid auction model is used to motivate broker pricing behavior. Confirming the model predictions, our empirical analysis shows that increased mortgage brokerage competition at the Metropolitan Statistical Area level leads to lower fees. The findings are robust to different measures of fees as well as different measures of competition. We also provide evidence that broker competition reduces mortgage origination fees on retail (nonbrokered) loans as well. In addition, our results indicate that pricing complexity is an important determinant of fees, and increased broker competition is associated with a higher probability of a loan being priced with transparency. Our results suggest that mortgage brokers increase competition and lower fees in the mortgage market.

Intensity models and transition probabilities for credit card loan delinquencies

We estimate the probability of delinquency and default for a sample of credit card loans using intensity models, via semi-parametric multiplicative hazard models with time-varying covariates. It is the first time these models, previously applied for the estimation of rating transitions, are used on retail loans. Four states are defined in this non-homogenous Markov chain: up-to-date, one month in arrears, two months in arrears, and default; where transitions between states are affected by individual characteristics of the debtor at application and their repayment behaviour since. These intensity estimations allow for insights into the factors that affect movements towards (and recovery from) delinquency, and into default (or not). Results indicate that different types of debtors behave differently while in different states. The probabilities estimated for each type of transition are then used to make out-of-sample predictions over a specified period of time.

The Russian Banking Sector in August 2013

In August 2013, Russia’s banking sector witnessed a continuation of the trends observed over the several previous months. As in July, a considerable proportion of growth in total banking liabilities was accounted for by the Bank of Russia and the RF Ministry of Finance. The role of retail loans in financing current household consumption expenditure continued to grow. At the same time, the banking sector’s capital adequacy and return on equity were declining.

Assessment of Unsecured Retail Credit Risk in Light of Cross Sell and Up Sell Strategy

Consolidation of the banking sector, as well as the presence of well recognized banking brands in the retail banking market brought innovation and a proactive approach in relation between bank and client This trend accompanied with an aggressive strategy initially caused the growth of the deposit base and then followed by cross sales and up sell strategies that led to a restructuring of the retail banking market and increase the confidence of the population to commercial banks. Cross sell and up sell as comprehensive strategies brought a remarkable changes in retail lending market. This dynamic of change that began in the middle of the past decade continued with rapid growth until the appearance of the global financial crisis, to slow down thereafter and continue with a moderate growth pace. This period of rapid growth of the so-called boom” period by commercial banks, restructured retail lending markets and brought tremendous change in debt to citizens ratio, where for short period of time the indebtedness of Macedonia citizens to commercial banks achieved 650 EUR per capita. In the meantime, the rapid indebtedness period of the citizens followed by economic instability so-called “BUST” period that caused serious problems and consequences on the quality of retail portfolio as well as in personal finances of clients. Purpose The aim of this dissertation was to apply the scoring model card built by four blocks of factors: socio-demographic factors, microeconomic, macroeconomic and relationship bankclient to determine the factors that affect the deterioration of performing unsecured retail loans and assess loans into categories none risk, low risk, medium risk and high risk. Design – A structured questionnaire was developed from the scoring model map and was distributed to the users of unsecured retail loans delivered by commercial banks in Macedonia. Findings – From the analysis carried out, it was found out that push strategy for market penetration applied by Cross Sell approach in the context of volatile economy have reached on pointer 2, an indicator that shows that commercial banks had managed to deliver at least two credit products to their clients. However another side of coins is not so bright in the figures, the results shows the existence of strong relationship between sales -risk, i.e. selling additional banking products has led to increased credit risk and has increased the level of loans classified with average risk and high risk. The results shows that Up Sell approach used for credit card market penetration has not yet reached pointer 2. Even though number of credit cards issued by commercial banks has reached 287,523 at the end of October 2012, the number of credit cards in clients’ wallet still International Journal of Academic Research in Progressive Education and Development July 2013, Vol. 2, No. 3 ISSN: 2226-6348 204 www.hrmars.com/journals does not have two credit cards. On the other hand, the results show that holders of two or more than two credit cards have increased tendency of failure in a medium-term period. Multinomial regression and Correlation analysis with SPSS 17.0 were used to administrate this research study.

Correlation between Growth Rate and Non Performing Retail Loans in the Republic of Macedonia

The research paper investigates the correlation between Gross Domestic Product, total declared and paid wages by Macedonian real economy and the level of nonperforming retail loans in the Republic of Macedonia in the period of the last quartile of 2010 till to first quartile of 2012 The examination of the feedback effect broadly confirms the strong correlation between real economy and nominal economy. From the analysis carried out, it was found that the level of NPLS in retail banking is directly attributed by ups and downs within the business cycle. Moreover, the research paper indicates that NPLs in retail loans responds to volatility in real economy, where increase or NPLs is perfectly negatively correlated to economic growth rate. Correlation analysis with SPSS 17.0 was used to administrate this research study.

Implications of Shifting Retail Market Shares for Loan Monitoring in a Dominant‐Bank Model

AbstractThis study utilizes a dominant‐bank model to investigate whether an increase in retail loan and deposit‐market concentration increases the incentives for both dominant and fringe banks to monitor their loans and thereby improve the quality of their loan portfolios. It shows that the effects on banks' incentives to engage in monitoring aimed at eliminating loan default losses in response to increased concentration of retail market shares of loans and deposits depend critically on whether the banks' asset and liability choices are interdependent. When the asset and liability decisions of both dominant and fringe banks are independent, a shift in market shares in favor of the dominant bank generates a straightforward increase in the incentives of all banks to monitor their loans. Under portfolio interdependence, the effects on monitoring outcomes at dominant banks and at banks within the competitive fringe depend on more complicated configurations of parameters. This fact helps explain mixed empirical evidence on the relationships between bank competition and measures of bank risk and soundness.

The Relation between Banks' Funding Costs, Retail Rates and Loan Volumes: An Analysis of Norwegian Bank Micro Data

We use a dynamic factor model and a detailed panel data set for six Norwegian bank groups to analyze i) how funding costs affect retail loan rates and ii) how retail rate differences between banks affect market shares. The data set consists of quarterly data for 2002Q1-2011Q3 and include information on loan volumes and retail (interest) rates for loans to firms and households. The cost of market funding is represented in our analysis by the three-month money market rate and a proxy for market risk - the credit spread on unsecured senior bonds issued by Norwegian banks. Our estimates clearly suggest incomplete pass-through: a 10 basis points increase in the market rate leads to an approximately 8 basis points increase in retail loan rates. We also find that credit demand from households is more elastic with regard to the loan rate than demand from businesses.

Fixing the Fixings: What Road to a More Representative Money Market Benchmark?

Interest rate derivatives on major currencies, with notional outstanding amounts adding up to hundreds of trillions, are mostly indexed on Libor and Euribor benchmarks, as are hundreds of billions in loans to enterprises, mortgages and other retail loans to the real economy. Yet, the prevailing role of these benchmarks appears to be more a legacy from history rather than reflecting today?s structure of banks? funding. Building on earlier work (Brousseau, Chailloux, Durre, 2009), this paper discusses various options to move towards a new benchmarking system in the money market. It proposes a more ambitious benchmark design that would consist of a trade-weighted index that would systematically pool all short-term wholesale funding operations of banks per tenor.

Fixing the Fixings: What Road to a More Representative Money Market Benchmark?

Interest rate derivatives on major currencies, with notional outstanding amounts adding up to hundreds of trillions, are mostly indexed on Libor and Euribor benchmarks, as are hundreds of billions in loans to enterprises, mortgages and other retail loans to the real economy. Yet, the prevailing role of these benchmarks appears to be more a legacy from history rather than reflecting today?s structure of banks? funding. Building on earlier work (Brousseau, Chailloux, Durre, 2009), this paper discusses various options to move towards a new benchmarking system in the money market. It proposes a more ambitious benchmark design that would consist of a trade-weighted index that would systematically pool all short-term wholesale funding operations of banks per tenor.

Mortgage Brokers, Origination Fees, and Competition

This paper examines the relation between mortgage origination fees and mortgage broker competition. A reverse first-price sealed-bid auction model is used to motivate pricing behavior by brokers. Confirming the model predictions, our empirical analysis shows that increased mortgage brokerage competition at the Metropolitan Statistical Area level leads to lower origination fees. The findings are robust to different measures of fees as well as different measures of competition. We also provide evidence that broker competition reduces mortgage origination fees on retail (non-brokered) loans as well. Our results suggest that mortgage brokers increase competition and lower fees in the mortgage market.

Stress testing a retail loan portfolio: an error correction model approach

The use of stress testing for risk monitoring has increased considerably over the last decade. Stress testing – a simulation technique used to assess the strength of a portfolio or a financial institution under unusual economic conditions – emerged as a powerful tool that was originally used in market risk. Its use has subsequently been extended into credit risk. To stress test a credit risk portfolio, practitioners focus on the key parameters that allow the risk of a credit portfolio to be assessed. These parameters, also known as Basel II parameters, are probability of default, loss given default, exposure at default and asset correlation. In this paper, using a time series approach (specifically, an error correction model), we focus on the probability of default parameter that is related to macroeconomic factors. Such an approach involves dealing with the nonstationarity of economic time series and cointegration issues. Hence, when the model is estimated, the probability of default can be simulated by measuring the effects of macroeconomic shocks applied to the model. In turn, these probabilities of default can be used to measure the impact on the probability of default under a given macroeconomic scenario, and then to improve the credit risk monitoring. The results of our study suggest that error correction models are well-suited to macroeconomic stress testing. Indeed, the fitting of the historical probability of default and the results under the stress scenarios considered here are satisfactory.

Mortgage Brokers, Origination Fees, Price Transparency and Competition

This paper examines the dynamics between mortgage broker competition, origination fees, and price transparency. A reverse first-price sealed-bid auction model is used to motivate broker pricing behavior. Confirming the model predictions, our empirical analysis shows that increased mortgage brokerage competition at the Metropolitan Statistical Area level leads to lower fees. The findings are robust to different measures of fees as well as different measures of competition. We also provide evidence that broker competition reduces mortgage origination fees on retail (non-brokered) loans as well. In addition, our results indicate that pricing complexity is an important determinant of fees, and increased broker competition is associated with a higher probability of a loan being priced with transparency. Our results suggest that mortgage brokers increase competition and lower fees in the mortgage market.

Competition Impact of Market Structure: The Case of Banking Services Markets in Two Russian Regions

This empirical paper adds to competition and industrial organization literature by exploring the interplay between industry structure and competitiveness on local, rather than nation-wide, markets. We use micro-level statistical data for banks in two Russian regions (Bashkortostan and Tatarstan) to estimate Herfindahl-Hirschman index, Lerner index, and Panzar-Rosse model. We estimate Panzar-Rosse model in two ways: via the widely used price-equation that accounts for scale effects and then via a revenue-equation that disregards scale effects as suggested by Bikker et al. (2009). We find both regional markets to be ruled by monopolistic competition, although estimation by revenue-equation does not reject monopoly hypothesis for Tatarstan. Existence of sizeable locally-owned and operated institutions does not necessarily lead to higher competitiveness of the given regional market, and the results from non-structural methods of estimation suggest that bank competition in Bashkortostan is stronger than in Tatarstan. Going further away from aggregated analysis we compute Lerner indices in two product segments of Tatarstan – retail and corporate loans – and find that retail segment is significantly more competitive. Local banks exert more market power in corporate loans, while federal branches – in retail loans.

A through-the-cycle model for retail lending economic capital

Problems in the US mortgage industry have shown weaknesses in the standard regulatory and economic capital approaches. Although a significant amount of discussion is occurring around how to segment portfolios or predict key variables in order to better fit the existing formulas, we believe that a re-examination of existing capital formulas with respect to credit risk is required. In this paper we develop a formula which is specifically tuned to the dynamics of retail loan portfolios and which could be employed for either regulatory capital or economic capital. The key advantages of this approach are that it is based upon a much more accurate model of retail loan defaults, does not require any new data feeds, is based upon readily available modeling frameworks, and can adapt to portfolio changes such as those observed in the US mortgage crisis.