Risk based pricing for unsecured lending

Thesis submitted in fulfillment of the requirements for the degree of Master of Management in Finance & Investment In the Faculty of Commerce and Law Management Wits Business School at the University of the Witwatersrand, 2015Risk based pricing has been a topic of discussion since the 2008 financial crisis as a result of the on-selling of packaged sub-prime assets. This paper will highlight the importance of correctly assessing risk within the framework of consumer credit provision. We will begin with a brief overview of the South African unsecured lending market, look into the definition of risk based pricing and the impact it has had in the market and conclude the paper by using a model by Robert Phillips to calculate the interest rate to be offered to a customer.AC201

Acceptance and profitability modelling for consumer loans

This thesis explores and models the relationships between offers of credit products, credit scores, consumers' acceptance decisions and expected profits generated using data that records actual choices made by customers and their monthly account status after being accepted. Based on Keeney and Oliver's theoretical work, this thesis esti¬ mates the expected profits for the lender at the time of application, draws the iso-profit curves and iso-preference curves, derives optimal policy decisions subject to various constraints and compares the economic benefits after the segmentation analysis.This thesis also addresses other research issues that have emerged during the explo¬ ration into profitability and acceptance. We use a Bivariate Sample Selection model to test the existence of sample selection bias and found that acceptance inference may not be necessary for our data. We compared the predictive performance of Support Vector Machines (SVMs) vs. Logistic Regression (LR) on default data as well as on accep¬ tance data, without finding that SVMs outperform LR. We applied different Survival Analysis models on two events of interest, default and paying back early. Our results favoured semi-parametric PH-Cox models separately estimated for each hazard

Corporate environmental performance considerations within bank lending processes : the social construction of risk perception.

SIGLEAvailable from British Library Document Supply Centre-DSC:DXN013001 / BLDSC - British Library Document Supply CentreGBUnited Kingdo

Basel III: Implications of Capital and Liquidity Regulations on Financial Stability during Economic Depression.

The dynamic global financial system has made it necessary to implement adequate regulatory measures that can effectively guarantee financial stability at the national and international levels. This thesis consists of three self-contained analytical chapters that focus on the effectiveness of evolving financial regulations in addressing systemic risk within the financial system. Despite numerous regulatory reforms introduced following the 2008 GFC, they are still concerns over the role of these regulations in mitigating complex issues related to systemic risk. The first study focuses on international and national regulatory frameworks in the context of conventional, hybrid, and Islamic banking. It analyses the guidance provided by the Basel Committee on Banking Supervision (BCBS) and the Islamic Financial Services Board (IFSB) and examines the differences in the treatment of credit, liquidity, and systemic risk across four countries. The IFSB converts BCBS guidance to ensure compliance with Sharia principles for Islamic banks. Further insights show variations in liquidity and capital requirements imposed on banks in different countries, highlighting the need for countryspecific regulations to address the unique risks. The second study uses data from emerging market economies to investigate the relationship between capital and liquidity regulations under Basel III and their impact on default risk and systemic risk. The study addresses whether the new liquidity and capital requirements, such as the net stable funding ratio and higher capital adequacy ratio, contribute to alleviating the default risk and systemic risk in emerging market economies. The third study focuses on the relationship between credit and liquidity risks and their impact on bank default risk. It also addresses the effect of bank liquidity creation on systemic risk across different types of banks. The findings suggest that while credit and liquidity risks are positively related, no significant relationship exists. The impact of credit and liquidity risks on bank default risk is significant for conventional and hybrid banks, while bank size and capital adequacy ratio play a greater role in the stability of Islamic banks. The joint interaction between credit and liquidity risk negatively influences banking stability. The key findings demonstrate that Basel III's liquidity requirements, such as the Net Stable Funding Ratio (NSFR), play an important role in forecasting banks' default probability and mitigating systemic risk. The insights gathered emphasise the importance of incorporating new mitigating measures, including NSFR, leveraging requirements, countercyclical buffers, and globally systemically important institution surcharges to promote financial stability. Additionally, it demonstrates the relevance of liquidity creation in determining bank stability and its implications for systemic risk. This study offers substantial contributions to the growing body of literature by highlighting the differences in regulatory frameworks, the importance of this approach in developing bank risk profiles, and how they are adequately addressed. The study also contributes to understanding how financial stability can be enhanced while reducing systemic liquidity risk. The study shows that banks, regulators, and policymakers must collaborate adequately across all levels to align risk management and improve regulations and guidelines. This includes sharing information and fostering coordination at the international level

Essays on banking credit acquisition : evidences from SMEs operating in adverse context: collateralization, mutual guarantees and borrowing discouragement

This thesis consists in four papers addressing the difficulties of Small and Medium-sized Enterprises (SMEs) when accessing banking finance in a context of high informational asymmetries , during a period of financial crisis and adjustments of the banking capital ratios. A central characteristic of SMEs is their dependence on bank credit for external financing (Degryse and Van Cayseele, 2000). Asymmetric information and agency costs, however, underlie the inadequate financing of these firms. Previous studies show that, due to the lack of information on individual borrowers, banks issue restrictive loan term contracts to reduce their default exposure. Banks can cause the interest rate to become inefficiently high such that worthy firms are driven out of the credit market (Stiglitz and Weiss, 1981). Alternatively, firms with negative net present value projects could obtain financial support in the credit market by taking advantage of cross-subsidization of borrowers with worthy projects (Mankiw, 1986; De Meza and Webb, 1987). In both cases, the reason for market failure is that banks are unable to assess the actual riskiness of SMEs and are forced to offer the same contract to them with a different probability of success. Hence, to overcome screening errors, lenders may reject part of a firm´s loan request (i.e., type I rationing) or simply turn down the credit (i.e., type II rationing) (Steijvers and Voordeckers, 2009a). Recent studies show that when borrowers’ wealth is large enough, banks may bypass informational asymmetries by offering a menu of contracts with collateral requirements which, acting as a sorting device, mitigates the screening errors and the credit rationing for good firms. In this case, risky borrowers will be self-selected by choosing contracts with high repayment (i.e., high interest rates) and low collateral, while safe borrowers will choose contracts with high collateral and low repayment (Han et al., 2009a). Thus, in the design of loan term contracts, collateral assumes a key role as a risk management instrument (Bonfim, 2005). Its role, however, has been little studied in the field of entrepreneurial finance and has been validated, particularly, in the context of a market-based system that gives to SMEs a wider range of funding sources (La Porta et al., 1998). Furthermore, it seems entirely plausible that the role of collateral differs within developed and less developed countries (Menkhoff et al., 2012), surrounded by different levels of informational asymmetries (Hainz, 2003; Beck et al., 2006; Menkhoff et al., 2006), and that their efficiency depends on its nature (i.e., business versus personal collateral – Mann, 1997b). The features of collateral also depend on the characteristics of the individual loan and the firm (Berger and Udell, 1998; Columba et al., 2010) as well as the legal procedures for loan recovery (Zecchini and Ventura, 2009). If SMEs are unable to post collateral while they have a short credit history, meet less rigorous reporting requirements and the availability of public information is scarce (Columba et al., 2010) or if the legal system is inadequate to protect creditor rights (Zecchini and Ventura, 2009), their access to bank credit would remain restricted especially during economic downturns, with negative effects on industry Dynamics competitiveness and growth (Beck and Demirgüc- Kunt, 2006). In this context, in almost half of countries around the world several types of loan guarantee funds have been created to help SMEs to gain easier access to the credit market (Green, 2003; Gonzàles et al., 2006; Beck et al., 2010; Cowling, 2010; Honohan, 2010). The importance of mutual guarantee schemes (MGS) is destined to further increase in the light of the Basel II and III Capital Accords which state that the guarantees of such institutions can, if granted in compliance with some requirements, allow banks to mitigate credit risk with small business lending, and thus, save regulatory capital (SPGM, 2007; Cardone-Riportella et al. 2008). In the recent years, the allocation of mutual guarantees gained a momentum, especially in Organization for Economic Co-operation and Development (OECD) countries. Since the onset of the crisis in the international financial sector, MGS have been the privileged instrument to extend credit for SMEs without compromising the capital requirements of banks (Uesugi et al, 2010). However, the question whether third-party guarantee is an effective instrument to promote lending to SMEs is a controversial issue in both academic and policy literature (Cowling, 2010; Honohan, 2010; Boschi et al., 2014). Traditionally, practitioners and policy makers have been concentrating much of their attention in those firms that apply for bank credit and specifically on the credit rationing problem, marginalizing those firms which do not apply for loans, even when they need external financing. These firms are the so-called “discouraged borrowers” (Cavalluzzo et al., 2002). Although the theoretical model of Kon and Storey (2003) for “discouragement” is, in principle, applicable to both developed and less developed economies, it is expected that discouragement is higher in less developed countries due to lower business traceability (e.g., Chakravarty and Xiang, 2013; Brown et al., 2011; Cole and Dietrich, 2012). Empirical literature on the discouragement problem in less developed countries is, however, limited providing a fertile ground for the study of the causes for the existence of discouraged borrowers. Based on this theoretical and empirical framework, this thesis critically approaches underexplored dimensions of banking lending activity targeted to SMEs financing, such as: the collateralization policy; the role of mutual guarantees; and the discouraged demand for credit. In the first chapter we examine the simultaneous impact of observed characteristics and private information on SMEs´ loan contracts, using data from a major commercial bank operating in Portugal, gathered between January 2007 and December 2010. Using a multiperiod setting, this paper provides the first analysis of the sorting by signalling and self-selection (SBSS) model in a bank-based system. Furthermore, this chapter provides empirical evidence of the effect of macroeconomic conditions on loan contracts during credit crunch and recession periods. Using 12,666 credit approvals, the main results show that borrowers with good credit scores and a high probability of success as they are unlikely to default, are more willing to pledge collateral in return for lower interest rate premium (IRP). In an interactive and sequential event, we confirm that lenders tailor the specific terms of the contract, based on the observable characteristics, increasing both collateral requirements and IRP, for observed risky borrowers, in line with Han et al (2009a)´s SBSS model. However, we reject the positive effect of loan size, predicted by the SBSS model, in terms of loan price negotiation. We argue that loan size decreases the probability of collateralization and the loan interest rates, suggesting that larger loans increase the potential payoff for banks and are assigned to borrowers with good observable characteristics. As loan maturity increases, in contrast, the lender is more likely to demand collateralization and IRP, especially if the borrower is bad or unobservably good, in line with moral hazard arguments (Jensen and Meckling, 1976; Boot et al., 1991). This paper shows that our findings are robust when we predict the degree of collateralization offered by the borrower, adding strength to the SBSS model and contributing to overcome its empirical gaps underlined by Lambrecht (2009). The second chapter scrutinizes the role of mutual guarantees in Portuguese bank lending activity. Using data provided by the same bank, covering 11,181 loans granted to SMEs between January 2008 and December 2010, this paper provides the first appraisal of Portuguese MGS in response to the financial crisis. We examine the characteristics of firms benefiting from mutual guaranteed loans and analyzes the impact of mutual guarantees in loan pricing as well as on the ex-post performance of borrowers. The findings provide a comprehensive insight confirming the value of mutual guarantees to improve Portuguese banking loan activity, especially for good SMEs operating in a stressful context, reducing the costs of borrowing and improving the ex post default of borrowers. Thus, we suggest that mutual guarantees could be used to raise the loan´s recovery rate allowing banks to meet their commitments with banking regulation and supervision in the context of financial crisis. We also argue that these effects are especially noticeable by combining third-party guarantees and collateral. The third chapter extends the empirical evidences on the determinants of the collateral in loan contract terms in countries characterized by low informational traceability and low creditor protection. It uses the fourth-round database of the Business Environment and Enterprise Performance Survey (BEEPS) carried out between 2007 and 2009, covering 3,403 ultimately banking credit approvals for SMEs, operating in Eastern European and Central Asia less developed countries. This paper examines the incidence of business and personal collateral and its level reporting first-hand evidence regarding the impact of the recently reformed credit environment on collateral requirements. The findings endorse the importance in producing and sharing private information between lenders to reduce informational asymmetries and consequently the need to provide collateral to receive a loan. Moreover, we find that market concentration increases banks´ lazy-behavior by asking for collateral not to mitigate observable risk but to reduce screening efforts. We also prove that reforms around the depth of information-sharing instruments by public credit registries only have practical effects mitigating credit constraints and reducing the collateral requirements when coupled with public reforms on its coverage. In addition, this chapter shows that business and personal collateral have distinctive values addressing moral hazard and adverse selection problems, especially relevant in the context under study, advising caution on the practitioners’ extrapolations when modeling the determinants of bank loans collateralization. The fourth chapter examines the conditions that favor the existence of discouraged borrowers, using data provided by the fourth-round of the BEEPS. This paper selects 6,307 loan seekers, among which 2,207 SMEs are typed as discouraged borrowers and 4,280 are classified as loan applicants. We prove that whereas the firm´s opaqueness, demographic issues and distance between borrower and lender better explains the discouragement by tough loan price and/or loan application procedures, the firm´s risk and the banking concentration explains the incidence of discouraged borrowers by fear of rationing. Nonetheless, we argue that in a higher concentrated banking system, those firms with a closer and more intensive relationship with the bank are more likely discouraged to apply for a loan than distant borrowers. This is reasonable if we assume that these firms are more likely to rely on banks as their primordial source of finance, getting locked by the superior bargaining power of the credit provider in a context of low competition (Sharpe, 1991; Detragiache et al. 2000). In turn, this bargaining power may discourage the business to apply for new loans. The innovator status, the legal protection of borrowers and lenders in a default event and the coverage of information sharing instruments help to explain the discouragement in a transversal way.Esta tese é composta por quatro artigos que abordam as dificuldades enfrentadas pelas Pequenas e Médias Empresas (PMEs) no acesso ao financiamento bancário num contexto de elevada assimetria de informação e/ou reduzida rastreabilidade de informação, durante um período de crise financeira e de ajustamentos nos rácios de capital do sector bancário. Uma das características centrais das PMEs é a sua dependência do crédito bancário no que diz respeito ao seu financiamento externo (Degryse e Van Cayseele, 2000), sendo frequentemente atribuídas as suas fragilidades no acesso a fontes externas de capital, maioritariamente dívida bancária, à assimetria de informação e aos custos de agência. A literatura evidencia que, devido à falta de informação sobre os mutuários, os bancos emitem contratos de empréstimo com cláusulas restritivas para reduzir a sua exposição ao risco e ao incumprimento. Os bancos tendem a exigir, por exemplo, taxas de juro tão elevadas que afastam empresas sustentáveis e saudáveis do mercado de crédito (Stiglitz e Weiss, 1981). Em alternativa, as empresas com projetos de valor atual líquido (VAL) negativo poderão obter apoio financeiro, no mercado de crédito bancário, aproveitando a subsidiação cruzada dos mutuários com projetos viáveis (Mankiw, 1986; De Meza e Webb, 1987). Em ambos os casos, a origem destas imperfeições de mercado reside na incapacidade dos bancos avaliarem corretamente o grau de risco efetivo das PMEs, e dos seus projetos, sendo forçados a oferecer o mesmo contrato para empresas com probabilidade de sucesso distintas. Assim, com o objetivo de mitigar os erros na triagem dos diferentes projetos, os credores podem ser levados a racionar o montante dos empréstimos a conceder a essas empresas (i.e., racionamento de tipo I) ou simplesmente a rejeitar o pedido de crédito (i.e., racionamento de tipo II) (Steijvers e Voordeckers, 2009a). Estudos recentes sugerem que quando a qualidade dos mutuários é elevada (isto é, quando apresentam bons ratings), os bancos podem superar a assimetria de informação oferecendo um menu de contratos que prevê a prestação de garantias bancárias que agem como um dispositivo de triagem, mitigando os erros de “screening” e, consequentemente, o racionamento do crédito para as empresas rentáveis. Neste caso, os mutuários com risco elevado optam por escolher contratos com taxas de juro mais elevadas e garantias bancárias mais reduzidas, enquanto que os mutuários com maior qualidade creditícia optam por contratos mais exigentes do ponto de vista dos requisitos ao nível das garantias bancárias em troca de taxas de juro mais baixas (Han et al., 2009a). Assim, na negociação dos contratos de empréstimos bancários, as garantias bancárias assumem um papel fundamental como um instrumento de sinalização e gestão de riscos (Bonfim, 2005). O seu papel, no entanto, tem sido pouco estudado no contexto das finanças empresariais e foi validado, em particular, no contexto “market-based system” que oferece às PMEs uma ampla gama de fontes de financiamento (La Porta et al., 1998). Além disso, assume-se como plausível o argumento de que o papel das garantias bancárias varia entre países desenvolvidos e países menos desenvolvidos, em função dos diferentes níveis de assimetria de informação que se colocam à atividade bancária (Hainz, 2003; Menkhoff et al, 2012; Beck et al, 2006; Menkhoff et al., 2006). Simultaneamente, reconhece-se que a eficiência das garantias bancárias depende da natureza dos ativos usados para garantir o empréstimo, o que pressupõe uma análise cuidada e singular sobre o valor intrínseco das garantias bancárias reais versus garantias pessoais (Mann, 1997). As características das garantias bancárias dependem igualmente das características individuais do empréstimo e da própria empresa (Berger e Udell, 1998; Columba et al, 2010), bem como do enquadramento legal em caso de incumprimento (Zecchini e Ventura, 2009). Se as PMEs forem incapazes de prestar garantias bancárias, se estas apresentarem um curto historial de crédito, se adotarem políticas de reporte de informação financeira pouco rigorosas e se a informação pública sobre si mesmas for reduzida (Columba et al., 2010), ou mesmo se o sistema legal for insuficiente para proteger os direitos dos credores (Zecchini e Ventura, 2009), o seu acesso ao crédito bancário permanecerá restrito, especialmente em períodos de recessão económica, com efeitos negativos sobre a dinâmica da economia, a sua competitividade e crescimento (Beck e Demirgüc- Kunt, 2006). Neste contexto, em quase metade dos países em todo o mundo, vários tipos de fundos de garantia mútua foram criados com o objetivo de facilitar o acesso ao crédito bancário por parte das PMEs (Green, 2003; Gonzàles et al., 2006; Beck et al., 2010; Cowling, 2010; Honohan, 2010). A importância das garantias mútuas é cada vez mais relevante devido aos Acordos de Capital de Basileia II e III, na medida em que estas permitem, se concedidas em conformidade com alguns requisitos, mitigar a exposição ao risco de crédito associado aos empréstimos concedidos às PMEs, de tal forma que podem promover a atividade de concessão de crédito garantindo em simultâneo o cumprimento dos rácios regulamentares de capital (SPGM, 2007; Cardone-Riportella et al., 2008). Com efeito, nos últimos anos, a atribuição de garantias mútuas ganhou um novo impulso, especialmente nos países que compõem a Organização para a Cooperação Económica e para o Desenvolvimento (OECD),uma vez que, no âmbito da crise no setor financeiro internacional, estas têm sido o instrumento privilegiado para estender o crédito às PMEs sem comprometer os requisitos de capital dos bancos (Uesugi et al, 2010). Não obstante, a eficiência das garantias mútuas prestadas por uma terceira entidade enquanto instrumento promotor da concessão de empréstimos às PMEs é ainda uma questão controversa na literatura política e académica (Cowling, 2010; Honohan, 2010; Boschi et al,2014). Tradicionalmente, os académicos e os decisores políticos têm vindo a concentrar grande parte da sua atenção nas empresas que solicitam empréstimos bancários e, especificamente, no problema do racionamento de crédito, marginalizando as empresas que não apresentam pedidos de crédito bancário, mesmo quando admitem necessitar de algum tipo de empréstimo. Estas empresas são designadas de “mutuários desencorajados” (“Discouraged borrowers”) (Cavalluzzo et al., 2002; Kon and Storey, 2003). Apesar da base teórica de Kon e Storey (2003) para o "desencorajamento" ser, em princípio, aplicável a economias desenvolvidas e a economias em desenvolvimento, existem evidências empíricas que sugerem que o problema do desencorajamento de crédito é maior em países menos desenvolvidos (por exemplo, Chakravarty e Xiang, 2013; Brown et al, 2011; Cole e Dietrich, 2012). No entanto, a literatura empírica sobre este problema nos países menos desenvolvidos é ainda limitada oferecendo um terreno fértil no que diz respeito ao entendimento sobre a existência deste tipo de mutuários. Com base no enquadramento teórico e empírico, esta tese aborda, de forma crítica, algumas dimensões pouco exploradas sobre a atividade de crédito bancário especificamente direcionada ao financiamento das PMEs, tais como: a política de garantias bancárias (reais e pessoais); o papel de garantias mútuas e o desencorajamento da procura de crédito bancário. Com efeito, no primeiro capítulo desta tese examinamos o impacto simultâneo das características observadas e da informação privada sobre os termos do contrato de crédito bancário das PMEs, usando dados recolhidos entre janeiro de 2007 e dezembro de 2010 sobre a atividade bancária de um grande banco comercial a operar em Portugal. Usando uma configuração de dados multi-período, este capítulo fornece a primeira abordagem ao modelo “Sorting by Signalling and Self-Selection” (SBSS) num contexto de “Bank-based System”. Para além disso, fornece evidências empíricas sobre o efeito das condições macroeconómicas sobre os termos dos contratos de crédito bancário durante o período de crise financeira e de recessão económica. Usando 12,666 pedidos de crédito aprovados, os principais resultados mostram que os mutuários com um bom rating estão mais dispostos a oferecer garantias bancárias em troca de uma redução percentual das taxas de juro, sabendo que têm uma elevada probabilidade de sucesso, não sendo, por isso, suscetíveis de entrar em incumprimento. Num processo interativo e sequencial, os resultados confirmam que os credores adequam os termos específicos do contrato de crédito em função das características observadas, aumentando quer os requisitos de garantias bancárias quer a taxa de juro para mutuários com maior risco observado, de acordo com o modelo SBSS proposto por Han et al (2009a). No entanto, rejeitamos a relação positiva entre o montante do empréstimo, prevista neste modelo, e o preço do crédito negociado. Neste capítulo, argumentamos que o montante do empréstimo diminui a probabilidade de prestar garantias bancárias reduzindo igualmente as taxas de juro exigidas para a obtenção do empréstimo, o que sugere que os empréstimos de maior montante aumentam o retorno potencial para os bancos e são atribuídos a mutuários com melhor qualidade creditícia. Em contrapartida, à medida que a maturidade dos empréstimos aumenta, torna-se cada vez mais provável que o credor exija garantias bancárias e taxas de juro mais elevadas, especialmente se o credor possui informações públicas negativas acerca do mutuário ou se a qualidade do mutuário do crédito não é observável, com o objetivo de reduzir o risco moral - “moral hazard” - e os riscos inerentes à substituição de ativos no período subsequente à concessão de crédito (“ex-post shifting behavior”) (Jensen and Meckling, 1976; Boot et al., 1991).Este capítulo mostra que estes resultados são robustos quando analisado o rácio de cobertura das garantias bancárias, reforçando as conclusões do modelo SBSS e contribuindo para ultrapassar as suas limitações empíricas sublinhada

Effectiveness of credit risk management practices of Ghanaian commercial banks in agricultural finance.

Doctoral Degree. University of KwaZulu-Natal, Durban.Lending to the agricultural sector by commercial banks in Ghana is characterised by high credit risk even though empirical evidence suggests that commercial banks can minimize this exposure by using appropriate practices to mitigate against adverse effects. This implies that the credit risk management practices adopted by Ghanaian commercial banks may be inadequate and ineffective due to credit risk identification challenges or problems in implementing credit risk management policies. The study investigated the methods adopted by commercial banks to identify credit risk, the effectiveness of the implementation of credit risk management policies, and the strategies used by Ghanaian commercial banks to mitigate credit risk in agricultural finance. The mixed methods approach, involving the use of quamtitative method using survey questionnaire and qualitative method through interviews and policy documents, was adopted. Data were analysed using Principal Components Analysis (PCA), ANOVA and MANOVA, documents, and thematic analysis. Findings indicated that some of the methods used by commercial banks to identify credit risk in agricultural finance do not meet commercial banks’ credit risk management needs. Also, some other methods that proved effective in minimising credit risk were not frequently used by commercial banks. Also, most Ghanaian commercial banks lacked technical units and technical employees with agricultural training backgrounds to manage the credit related to agricultural finance. Further, agricultural activities lacked insurance schemes to protect against credit risk. The ANOVA and MANOVA tests showed significant differences in credit risk management practices among Ghanaian commercial banks. The study recommeneded the need for a robust credit risk management strategies to mitigate credit risk in agricultural finance. The agricultural sector should be supported with refined policy and implementation documents informed by the reality of borrowers’ inability to honour loan contracts. The findings point to the needs to increase credit guarantee schemes and create incentive-based risk-sharing systems for small and medium agriculture enterprises; and establish more robust credit referencing bureau institutions to reduce credit risk

Sociological institutionalist approach on banks’ lending behavior in Myanmar (Burma)

A thesis submitted to the University of Bedfordshire in partial fulfilment of the requirements for the degree of Doctor of PhilosophyThis is an exploratory study which investigated the process by which banks' lending behaviour in Myanmar (Burma) was influenced by the institutional environment and their responses towards them. The theoretical framework used in this study was primarily drawn upon Scott's new institutional theory. Since the theory focused on the convergent perspective rather than divergent perspective, the theory of Oliver's strategic responses to these institutional pressures, coercive, normative and mimetic, was incorporated in the theoretical framework development. The main method of data collection was interviews. NVIVO was used to analyse these interviewed data. However, descriptive statistics were also used to provide a comprehensive picture of the context being studied. The findings suggest that banks' always attempted to extemalise risks to borrowers. Their responses to institutional pressures were to conform but a range of other forms of resistance were also found. However, strong forms of resistance were uncommon. I have also identified the situations in which the banks would choose either strong or weak forms of resistance to institutional pressures. Such identifications may add understanding to the specific lending strategies that are developed in different circumstances. The study also contributed to closing the gap in banking literature through conducting research in the context of Myanmar, which was previously unexplored. In addition, it suggests areas needed to be improved for financial sector development in Myanmar

Novel information in estimating loss given default in Brazil

The Basel Accord regulates risk and capital requirements to ensure that a bank holds capital proportional to the exposed risk of its lending practices. Basel II allows banks to develop their own empirical models based on historical data for probability of default (PD), loss given default (LGD) and exposure at default (EAD). Brazil was among the first emerging market countries to release a timetable for the implementation of the Basel II Accord and aimed to apply it uniformly to all Brazilian financial institutions from 2005 to 2011. Within this context, the necessity arises of conducting research that could assist the financial institutions in improving the accuracy of their models. This thesis has three objectives. The first is to develop a macro-economic model to predict the behaviour of the aggregate delinquency in Brazilian consumer loans. The model consists in testing co-integrating relationships and then estimating a short run error correction model. The results based on monthly data from 2000 to 2012 show that the delinquency rate is particularly sensitive to shocks on GDP and to the variation of workers’ income. The analysis then shifts to micro or account level to model the behaviour of borrowers and certain novel types of information that can be used for prediction. Second, customers fail to make loan repayments for a number of reasons, ranging from simple forgetfulness to deliberate attempts. For this reason, the second objective is to investigate the reasons for default and to explore ways of incorporating these variables into Recovery Rate (RR = 1 - LGD) models, since the standard approach overlooks real reasons for default and uses proxies for them such as marital status and length of employment. Customers who failed to repay their loans were interviewed in order to discover the causes for this failure. In addition, the interviews included questions aimed to measure the customer’s personality traits and their financial knowledge in relation to the reasons for default. The empirical results show that the variables proposed in this study, namely, reason for missing payment, financial knowledge and risk taken, improve the prediction of the recovery rate. Thirdly, it is known that recovery depends on the debt collection process and on the different options or actions that collection departments can take. Yet there is practically no literature exploring the impact of the lender’s collection actions on RR/LGD. This work fills this gap by investigating the role of different collection actions at the loan-level for a retail credit product, and by estimating LGD models using Panel Data regressions

China State Commercial Banks' Non-Performing Loans: Workout and Prevention

PhDThe purpose of this thesis is to examine the very significant problem of State bank nonperforming loan (NPL) in China. NPLs undermine the stability of China's banking system and the efficient operation of its markets. This thesis will make recommendations for developing better workout procedures to deal with existing NPLs and explore the role of banking regulation and supervision in NPL prevention, as well as in avoiding impacts of NPLs on the stability of banking system, drawing on experiences at national, regional and international levels. The accumulation of NPLs in China has been caused by the dominant role of State banks in China's financial markets, policy loans to state owned enterprises (SOEs), unnecessary administrative controls on banks' lending activities, weak internal controls within State banks and inappropriate banking regulation and supervision. All these have seriously ruined the conditions of market discipline in China and resulted not only in large amount of NPL stock, but also the constant creation of new NPLs on State banks' balance sheets. The NPL problem in China is not limited to individual banks. It is a systemic problem closely connected to the SOE problem. The existing bank NPLs cannot be worked out without debt and enterprise restructuring. The balance sheets of banks and firms must be cleaned up by, first, recapitalizing banks to write off and make provision for existing NPLs, and, second, setting up independent asset management companies to purchase and manage bank NPLs. To prevent the increasing accumulation of new NPLs, unnecessary administrative controls on banks must be removed; prudential banking regulation and supervision much be enhanced; appropriate internal control systems must be promoted within banks, especially with regard to the proper risk evaluation systems and internal decision-taking structures. To avoid the damaging impacts of NPL problem on the stability of the banking system, ' an explicit limited deposit insurance system should be introduced; the central bank's lender of last resort facilities must be properly defined; bank insolvency resolution mechanisms must be put in place. In a word, the proper functioning of market discipline must be restored in China.Ministry of Education, the PRC and the K. C. Wong Education Foundation (Hong Kong