Determining The Economic Value Of Ambiguous Loan Portfolios

Keywords

Ambiguous loan portfolios; Beta-Binomial distribution; Economic value; Relationship lending; Sensitivity; Specificity

Abstract

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.

Publication Date

5-1-2015

Publication Title

Finance Research Letters

Volume

13

Number of Pages

148-154

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.frl.2015.02.002

Socpus ID

84928762697 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/84928762697

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