Determining the economic value of ambiguous loan portfolios

Dror Parnes

Finance Research Letters, 2015, vol. 13, issue C, 148-154

Abstract: This study presents a framework to assess the fair economic value of ambiguous loan portfolios, i.e. when the credit qualities of the loans within are deeply masked or simply undetermined through traditional techniques. In this case, the second best choice for approximating the portfolio’s economic value would be to lean on the past performance of the designated credit officer who either approved or rejected the loan applications. The article presents a Beta-Binomial distribution model that captures the entire spectrum of possible economic valuations and their respective likelihoods and shows that this dissemination can be summarized to a single fair economic value for any ambiguous loan portfolios. This methodology exhibits high importance to regulators, policy makers, and internal auditors.

Keywords: Ambiguous loan portfolios; Economic value; Relationship lending; Beta-Binomial distribution; Sensitivity; Specificity (search for similar items in EconPapers)
JEL-codes: C15 G21 G28 H81 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:13:y:2015:i:c:p:148-154

DOI: 10.1016/j.frl.2015.02.002

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