Determining the economic value of ambiguous loan portfolios
Abbreviated Journal Title
Financ. Res. Lett.
Ambiguous loan portfolios; Economic value; Relationship lending; Beta-Binomial distribution; Sensitivity; Specificity; BANKS; Business, Finance
This study presents a framework to assess the fair economic value of ambiguous loan portfolios, i.e. when the credit qualities of the loans within are deeply masked or simply undetermined through traditional techniques. In this case, the second best choice for approximating the portfolio's economic value would be to lean on the past performance of the designated credit officer who either approved or rejected the loan applications. The article presents a Beta-Binomial distribution model that captures the entire spectrum of possible economic valuations and their respective likelihoods and shows that this dissemination can be summarized to a single fair economic value for any ambiguous loan portfolios. This methodology exhibits high importance to regulators, policy makers, and internal auditors. (C) 2015 Elsevier Inc. All rights reserved.
Finance Research Letters
"Determining the economic value of ambiguous loan portfolios" (2015). Faculty Bibliography 2010s. 6747.