Using Nonperforming Loan Ratios to Compute Loan Default Rates With Evidence From European Banking Sectors

Dobromił Serwa

doi:10.33119/ERFIN.2016.1.1.3

Dobromił Serwa Institute of Econometrics, Warsaw School of Economics, Poland

DOI: https://doi.org/10.33119/ERFIN.2016.1.1.3

Keywords: NPL Ratio, Default Rate, Credit Growth, Housing Loans, European Banking Sectors

Abstract

This research is the first attempt to calibrate default rates of loan portfolios using raw data on nonperforming loans and some additional information on the maturity structure of the loan portfolios. We applied a simple model of loan quality, controlling for loan maturities and dynamics of loan supply. Results for nine national aggregate indices of nonperforming housing loans in the Czech Republic, Greece, Ireland, Hungary, Latvia, Poland, Portugal, Romania, and Spain revealed strong differences in the dynamics of calibrated default probabilities between countries. Calibrated default rates were correlated with macroeconomic factors, but the linkages depended on the markets investigated.

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