Over the past 10 years, a bank has experienced the following loan losses on its C&I loans,
Question:
Over the past 10 years, a bank has experienced the following loan losses on its C&I loans,
consumer loans, and total loan portfolio.
Year C&I Loans Consumer Loans Total Loans
2018 0.0080 0.0165 0.0075
2017 0.0088 0.0183 0.0085
2016 0.0100 0.0210 0.0100
2015 0.0120 0.0255 0.0125
2014 0.0104 0.0219 0.0105
2013 0.0084 0.0174 0.0080
2012 0.0072 0.0147 0.0065
2011 0.0080 0.0165 0.0075
2010 0.0096 0.0201 0.0095
2009 0.0144 0.0309 0.0155
Using regression analysis on these historical loan losses, the bank has estimated the following:
XC= 0.002 + 1.8XL and Xh= 0.003 + 0.9XL
where XC= loss rate in the commercial sector, Xh= loss rate in the consumer (household) sector, and XL= loss rate for its total loan portfolio.
a. If the bank's total loan loss rates increase to 15 percent, what are the expected loss rate increases in the commercial and consumer sectors?(2 marks)
b. In which sector should the bank limit its loans and why?(2 marks)
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders