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


Table 3a
Asset Quality 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 -5.0433 *** (0.6415) -3.5824 *** (0.7029) -1.3509 * (0.7819) -1.6506 ** (0.7448)
Intercept 2 -1.9807 *** (0.6296) -0.2155 (0.6933) 2.6114 *** (0.7863) 2.2749 *** (0.7491)
Equity -0.0530 *** (0.0134) -0.0538 *** (0.0140) -0.0265 * (0.0141) -0.0240 * xxx
Allowance for loan losses 0.4428 *** (0.1113) 0.4001 *** (0.1151) 0.1066 (0.1235) 0.0783 (0.1213)
Loans past due 30-89 days 0.4561 *** (0.0536) 0.3414 *** (0.0561) 0.3180 *** (0.0608) 0.3430 *** (0.0598)
Loans past due 90 days or more 0.5949 *** (0.1206) 0.4589 *** (0.1182) 0.4213 *** (0.1250) 0.4567 *** (0.1262)
Nonaccrual loans and leases 1.1681 *** (0.0880) 0.9364 *** (0.0888) 0.5105 *** (0.0940) 0.5196 *** (0.0936)
Other real estate owned 1.1672 *** (0.1613) 0.9804 *** (0.1693) 0.4466 *** (0.1634) 0.4466 *** (0.1563)
Volatile liabilities 0.0010 (0.0046) 0.0042 (0.0048) 0.0031 (0.0052) 0.0025 (0.0051)
Liquid assets 0.0017 (0.0055) -0.0037 (0.0059) -0.0055 (0.0064) -0.0048 (0.0063)
Loans and securities with maturities of 5 years or more 0.0096 (0.0060) 0.0043 (0.0064) 0.0042 (0.0069) 0.0059 (0.0068)
Gross charge-offs on loans & leases 0.4576 ** (0.1843) 0.3358 * (0.1719) 0.0010 (0.1628) -0.0051 (0.0010)
Provisions for loan & lease losses -0.0209 (0.2007) -0.1239 (0.1641) 0.0317 (0.1611) 0.0317 (0.1638)
Income before taxes and extraordinary items -0.5027 *** (0.0719) -0.4193 *** (0.0712) -0.1533 ** (0.0743) -0.1541 ** (0.0739)
State personal-income growth, lag 1 0.0403 (0.0349) 0.0452 (0.0364) 0.0659 * (0.0396) 0.0692 * (0.0394)
State personal-income growth, lag 2 -0.0052 (0.0373) -0.0191 (0.0389) -0.0011 (0.0426) 0.0063 (0.0423)
State personal-income growth, lag 3 0.1004 ** (0.0400) 0.0700 * (0.0418) 0.1001 ** (0.0461) 0.1098 ** (0.0458)
State personal-income growth, lag 4 0.0109 (0.0296) -0.0032 (0.0309) -0.0072 (0.0335) -0.0050 (0.0334)
State personal-income growth, lag 5 -0.0612 ** (0.0286) -0.0570 * (0.0300) -0.0738 ** (0.0328) -0.0761 ** (0.0326)
Composite CAMELS dummy 1         -4.4103 *** (0.2709) -4.8278 *** (0.2407)
Composite CAMELS dummy 2         -1.9780 *** (0.2336) -2.1607 *** (0.2129)
Concentrations of credit dummy 1     -0.1930 (0.1338) -0.1672 (0.1467)    
Concentrations of credit dummy 3     0.9020 (0.2052) -0.0230 (0.2239)    
Fail-to-adjust pricing dummy 1     -0.2734 ** (0.1122) -0.1256 (0.1245)    
Fail-to-adjust pricing dummy 3     -0.2843 (0.2095) -0.2022 (0.2311)    
Principal reduction dummy 1     -0.3490 *** (0.1044) -0.1127 (0.1169)    
Principal reduction dummy 3     0.3506 (0.2137) 0.1761 (0.2309)    
Written policies versus practices dummy 1     -0.2147 * (0.1171) -0.0625 (0.1309)    
Written policies versus practices dummy 3     0.0659 (0.2442) -0.2283 (0.2626)    
Current underwriting practices dummy 1     -0.1734 (0.1689) -0.1433 (0.1861)    
Current underwriting practices dummy 3     0.4647 ** (0.1970) 0.2944 (0.2132)    
Portfolio credit risk dummy 1     -0.7150 *** (0.1496) -0.2278 (0.1674)    
Portfolio credit risk dummy 3     0.2805 (0.1799) -0.1278 (0.1980)    
Loan administration dummy 1     -0.1503 (0.1389) -0.0053 (0.1538)    
Loan administration dummy 3     0.5469 *** (0.1711) 0.2209 (0.1893)    
Akaike Information Criteria 3,557.07   3,291.75   2,821.08   2,817.89  
Somers' D Statistic 61.8%   67.7%   77.0%   76.6%  
-2 x log likelihood, L(specification) 3,519.07   3,225.75   2,751.08   2,775.89  
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 293.32, 7, 14.07           24.81, 7, 14.07  
* indicates significance at 10% level, ** indicates signifcance at 5% level and *** indicates significance at 1% level

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