Bank Credit Risk

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 01 April 1993

Working Paper No. 8
By E P Davis

The paper evaluates the contribution industrial-sector data on loan losses could make to diversifying and pricing bank risk. It derives the mean, variance and cyclical sensitivity of sectoral provisions and writeoffs, then assesses implications for loan pricing; standards of capital adequacy; risk borne by sectorally-concentrated banks; and bank risk over time. Complementary econometric estimates for aggregate losses highlight the role of corporate gearing and rapid balance sheet growth. It is suggested all banks should collect and employ sectoral loss data, and the analysis could be borne in mind for any future renegotiation of the Basle Accord. 

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