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Bank Loan Underwriting Practices: Can Examiners’ Risk Assessments Contribute to Early-Warning Systems?


Table 2a
Composite CAMELS Rating for Next 12 Months Prediction
Logistic Regressions
FDIC Survey Data 1996-1998
  Specification 1 Specification 2 Specification 3 Specification 4
Explanatory Variable Coefficient Estimate (standard error) Coefficient Estimate (standard error) Coefficient Estimate (standard error) Coefficient Estimate (standard error)
Intercept 3 -3.4875 *** (0.6322) -1.8018 *** (0.6887) 0.3411 (0.8672) -0.1626 (0.8314)
Intercept 2 0.7643 (0.6200) 2.8482 *** (0.6826) 6.0667 *** (0.8842) 5.4731 *** (0.8449)
Equity -0.0845 *** (0.0137) -0.0932 *** (0.0146) -0.0132 (0.0167) -0.0082 (0.0164)
Allowance for loan losses 0.2870 ** (0.1144) 0.2822 ** (0.1203) -0.1051 (0.1424) -0.1059 (0.1400)
Loans past due 30-89 days 0.4019 *** (0.0556) 0.2672 *** (0.0581) 0.3131 *** (0.0715) 0.3581 *** (0.0695)
Loans past due 90 days or more 0.3989 *** (0.1182) 0.2531 ** (0.1188) 0.2872 ** (0.1391) 0.3377 ** (0.1423)
Nonaccrual loans and leases 0.8790 *** (0.0849) 0.6806 *** (0.0890) 0.4132 *** (0.1005) 0.4380 *** (0.0980)
Other real estate owned 1.1677 *** (0.1597) 1.0409 *** (0.1633) 0.4772 *** (0.1609) 0.4619 *** (0.1514)
Volatile liabilities 0.0127 *** (0.0046) 0.0160 *** (0.0048) 0.0048 (0.0060) 0.0027 (0.0059)
Liquid assets -0.0024 (0.0054) -0.0084 (0.0057) -0.0035 (0.0072) -0.0014 (0.0072)
Loans and securities with maturities of 5 years or more 0.0090 (0.0058) 0.0029 (0.0061) -0.0017 (0.0077) 0.0005 (0.0077)
Gross charge-offs on loans & leases 0.1665 (0.1851) 0.0030 (0.1837) -0.2528 (0.1939) -0.2225 (0.1919)
Provisions for loan & lease losses 0.2955 * (0.1698) 0.3304 * (0.1803) 0.3814 ** (0.1744) 0.3229 * (0.1734)
Income before taxes and extraordinary items -1.4850 *** (0.0803) -1.4271 *** (0.0841) -0.6367 *** (0.0893) -0.6314 *** (0.0879)
State personal-income growth, lag 1 0.0074 (0.0346) 0.0103 (0.0363) 0.0041 (0.0457) 0.0058 (0.0453)
State personal-income growth, lag 2 -0.0050 (0.0367) -0.0129 (0.0384) -0.0342 (0.0485) -0.0296 (0.0483)
State personal-income growth, lag 3 0.0527 (0.0389) 0.0238 (0.0409) 0.0625 (0.0520) 0.0694 (0.0513)
State personal-income growth, lag 4 -0.0194 (0.0291) -0.0259 (0.0305) -0.0525 (0.0382) -0.0508 (0.0380)
State personal-income growth, lag 5 -0.0569 ** (0.0281) -0.0547 * (0.0295) -0.0788 ** (0.0373) -0.0737 ** (0.0371)
Composite CAMELS dummy 1         -6.6069 *** (0.3037) -6.8582 *** (0.2850)
Composite CAMELS dummy 2         -3.0459 *** (0.2618) -3.1515 *** (0.2480)
Concentrations of credit dummy 1     -0.1187 (0.1371) 0.0256 (0.1729)    
Concentrations of credit dummy 3     -0.0140 (0.2128) -0.0880 (0.2640)    
Fail-to-adjust pricing dummy 1     -0.3832 *** (0.1131) -0.3032 ** (0.1438)    
Fail-to-adjust pricing dummy 3     -0.0915 (0.2239) -0.2768 (0.2745)    
Principal reduction dummy 1     -0.2410 ** (0.1053) -0.1171 (0.1345)    
Principal reduction dummy 3     0.3994 * (0.2314) 0.2375 (0.2741)    
Written policies versus practices dummy 1     -0.4237 *** (0.1205) 0.0059 (0.1543)    
Written policies versus practices dummy 3     0.4564 * (0.2682) 0.1354 (0.3182)    
Current underwriting practices dummy 1     -0.1206 (0.1517) 0.0712 (0.1997)    
Current underwriting practices dummy 3     0.4282 ** (0.2174) 0.6263 ** (0.2555)    
Portfolio credit risk dummy 1     -0.3879 *** (0.1388) -0.2721 (0.1824)    
Portfolio credit risk dummy 3     0.1406 (0.1960) -0.2552 (0.2327)    
Loan administration dummy 1     -0.4847 *** (0.1294) -0.1457 (0.1703)    
Loan administration dummy 3     0.2528 (0.1849) -0.1127 (0.2274)    
Akaike Information Criteria 3490.31   3246.88   2264.28   2,261.74  
Somers' D Statistic 65.9%   71.2%   83.2%   82.6%  
-2 x log likelihood, L(specification) 3,452.31   3,180.88   2,194.28   2,219.74  
Likelihhood-ratio test statistic for significance of survey variables: L(1) - L(2)           L(4) - L(3)  
Chi-square, degress of freedom, 5 percent critical value 271.43, 7, 14.07           25.46, 7, 14.07  
* indicates significance at 10% level, ** indicates signifcance at 5% level and *** indicates significance at 1% level

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