The new FASB current expected credit loss (CECL) proposal, IASB’s IFRS 9, and regulatory stress testing all require that the industry move toward forecasting probabilities of future events, rather than simply rankordering loans. Even more importantly, effective loan pricing requires this same forward-looking, loan-level forecasting. We created a loan-level version of Age-Period-Cohort (APC) mod...

The loan market has contributed to the success and failure of economies. Examples of such failures are the US subprime mortgage crisis as well as the global economic meltdown that followed. Many factors influence the loan market, making it volatile and vulnerable. As such, it is important to understand the extent of its vulnerability. Such uncertainties emerge from asymmetric information in the...

Although federal student aid currently disburses more than $130 billion to 14 million students annually, students primarily cite financial difficulties as their reason for dropping out of college. In this paper, I use subtle differences in the federal aid application process to study how small costs affect student borrowing behavior by taking advantage of a policy change in which schools transi...

The Basel II Accord pointed out benefits of credit risk management through internal models to estimate Probability of Default (PD). Banks use default predictions to estimate the loan applicants’ PD. However, in practice, PD is not useful and banks applied credit scorecards for their decision making process. Also the competitive pressures in lending industry forced banks to use profit scorecards...

This paper investigates the effect of relationship-lending on loan contract terms, especially on the interest rate, loan value, and collateral requirements. For this purpose, data on 4850 loans granted by a bank in 2016 is employed. Our estimations show a negative and significant relationship between the interest rate and quality and quantity of borrower-lender relationship. Furthermore, there ...

Loan commitments represent more than 82 percent of all commercial and industrial loans by domestic banks. This paper develops a valuation model for loan commitments incorporating early exercise, multiple fees, partial exercise and credit risk. The model is analytically tractable and easy to implement. Using a sample of commercial paper backup credit lines from the Dealscan database, we show tha...

Many financial products contain prepayment options. Loan contracts are often structured to provide the borrower with the option to prepay the loan at any time, or on specific dates, prior to the maturity date of the loan. These options are important aspects of these financial products. The most commonly encountered investment product with these feature is the mortgage backed security. Investmen...

A day almost like any other … Mamadou Djiré is in charge of the Djicoroni Para outlet in Bamako, Mali. He is opening up the financial coop because several members will be arriving to withdraw funds from their current accounts or make deposits to cover loan payments. Mamadou takes out the cash drawer from the strongbox opens up his teller window and turns on the pocket computer with its AMIO Tel...

A dramatic rise in subprime foreclosures over the past several years has led to calls for restrictions of, or prohibitions against, a range of lending practices loosely termed “predatory.” Several cities and states have enacted legislation or regulations aimed at eliminating predatory practices, and some advocacy groups have endorsed action nationally. This working paper uses data from the Chic...