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


Table 2b
Composite CAMELS Rating for Next 12 Months Prediction
Logistic Regressions
FDIC Survey Data 1998-2001
  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 -2.8577 *** (0.4645) -0.9439 * (0.5111) 0.5114 (0.6457) 0.0835 (0.6093)
Intercept 2 0.9511 ** (0.4598) 3.3963 *** (0.5138) 5.8893 *** (0.6560) 5.3746 *** (0.6172)
Equity -0.1039 *** (0.0094) -0.1002 *** (0.0096) -0.0588 *** (0.0114) -0.0561 *** (0.0113)
Allowance for loan losses 0.2726 *** (0.0896) 0.1362 (0.0918) -0.0856 (0.1098) -0.0777 (0.1084)
Loans past due 30-89 days 0.3849 *** (0.0404) 0.2975 *** (0.0425) 0.2936 *** (0.0506) 0.3128 *** (0.0497)
Loans past due 90 days or more 0.5573 *** (0.0906) 0.4152 *** (0.0941) 0.4367 *** (0.1062) 0.4699 *** (0.1050)
Nonaccrual loans and leases 0.7969 *** (0.0632) 0.5514 *** (0.0673) 0.3093 *** (0.0770) 0.3452 *** (0.0752)
Other real estate owned 0.9775 *** (0.1229) 0.7682 *** (0.1299) 0.4682 *** (0.1442) 0.4815 *** (0.1455)
Volatile liabilities 0.0117 *** (0.0032) 0.0154 *** (0.0033) 0.014 *** (0.0040) 0.0124 *** (0.0040)
Liquid assets -0.0071 * (0.0039) -0.0108 *** (0.0041) -0.0036 (0.0052) -0.0020 (0.0051)
Loans and securities with maturities of 5 years or more 0.0005 (0.0044) -0.0038 (0.0046) -0.0063 (0.0058) -0.0046 (0.0057)
Gross charge-offs on loans & leases -0.2150 (0.1463) -0.3008 ** (0.1374) -0.3312 ** (0.1441) -0.3308 ** (0.1416)
Provisions for loan & lease losses 0.5744 *** (0.1327) 0.4678 *** (0.1386) 0.4233 *** (0.1469) 0.4434 *** (0.1486)
Income before taxes and extraordinary items -1.2041 *** (0.0473) -1.1661 *** (0.0494) -0.5350 *** (0.0541) -0.5081 *** (0.0534)
State personal-income growth, lag 1 0.0590 *** (0.0217) 0.0649 *** (0.0228) 0.0402 (0.0286) 0.0353 (0.0284)
State personal-income growth, lag 2 0.0844 *** (0.0213) 0.0960 *** (0.0223) 0.1003 *** (0.0282) 0.0931 *** (0.0279)
State personal-income growth, lag 3 -0.0184 (0.0270) -0.0285 (0.0283) -0.0293 (0.0355) -0.0274 (0.0352)
State personal-income growth, lag 4 -0.0232 (0.0248) -0.0394 (0.0260) -0.0544 * (0.0326) -0.0509 (0.0323)
State personal-income growth, lag 5 0.0573 ** (0.0250) 0.0559 ** (0.0262) 0.0616 * (0.0326) 0.0591 * (0.0323)
Composite CAMELS dummy 1         -6.4065 *** (0.1996) -6.7808 *** (0.1820)
Composite CAMELS dummy 2         -2.7633 *** (0.1633) -2.9736 *** (0.1485)
Concentrations of credit dummy 1     -0.2569 *** (0.0972) -0.0375 (0.1206)    
Concentrations of credit dummy 3     -0.2200 (0.1536) -0.1257 (0.1878)    
Fail-to-adjust pricing dummy 1     -0.1899 (0.1208) -0.1831 (0.1453)    
Fail-to-adjust pricing dummy 3     0.5867 ** (0.2608) 0.5157 * (0.3012)    
Principal reduction dummy 1     -0.2126 ** (0.0972) -0.0914 (0.1185)    
Principal reduction dummy 3     -0.0571 (0.2275) -0.1358 (0.2583)    
Written policies versus practices dummy 1     -0.2257 ** (0.0993) 0.1558 (0.1213)    
Written policies versus practices dummy 3     0.4069 * (0.2202) 0.2335 (0.2528)    
Current underwriting practices dummy 1     -0.3246 *** (0.1126) -0.2106 (0.1398)    
Current underwriting practices dummy 3     0.4666 * (0.2572) 0.0033 (0.2824)    
Portfolio credit risk dummy 1     -0.4559 *** (0.1035) -0.0741 (0.1291)    
Portfolio credit risk dummy 3     0.3801 (0.2319) -0.2249 (0.2550)    
Loan administration dummy 1     -0.7749 *** (0.1002) -0.3636 *** (0.1249)    
Loan administration dummy 3     0.3401 (0.2198) 0.1814 (0.2491)    
Akaike Information Criteria 6,374.13   5,814.50   4,055.66   4,076.28  
Somers' D Statistic 65.7%   72.2%   84.7%   84.3%  
-2 x log likelihood, L(specification) 6,336.13   5,748.50   3,985.66   4,034.28  
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 587.76, 7, 14.07           48.62, 7, 14.07  
* indicates significance at 10% level, ** indicates signifcance at 5% level and *** indicates significance at 1% level

Last Updated 01/13/2004 Questions, Suggestions & Requests