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Modeling non performing loans probability in the commercial banking system: efficiency and effectiveness related to credit risk in Italy

Bernardo Maggi and Marco Guida ()
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Marco Guida: Department of Economics, Sapienza University of Rome

No 1, Working Papers - Dipartimento di Economia from Dipartimento di Economia, Sapienza University of Rome

Abstract: In this paper we model the effect of the non performing loans on the cost structure of the commercial banking system. With this aim, we comment on an increase in the non performing loans by studying the consequences of such a change on the cost function and compute the probability of failure of maintaining a performing loan as such. In so doing we are convinced that geography does matter and evaluate the risk propensity of the bank towards the nonperforming loans accordingly. We finally stress that traditional efficiency indicators of cost elasticity do not fit properly with such a problem and propose a measure based on the costs for managing and monitoring the loans which, according to the related density function, will reveal effectively as non performing.

Keywords: Non performing loans probability; Bank management; Cost function; Efficiency and effectiveness indicators; Flexible forms. (search for similar items in EconPapers)
JEL-codes: G21 D24 C33 C51 L23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
Date: 2009, Revised 2009
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Journal Article: Modelling non-performing loans probability in the commercial banking system: efficiency and effectiveness related to credit risk in Italy (2011) Downloads
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