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- Title
Impact of Asset Price Bubbles in Developing Conservative Models for Allowances on Loans and Leases Losses (ALLL) estimate.
- Authors
Ganguli, Tanmoy
- Abstract
Following the financial crisis in 2008, almost all statistical loss forecasting models put in place by most banks and financial institutions had under predicted the reserves to be kept against next 12 months estimated credit losses. The main reason for the failure, being the inability of the models to predict the probable occurrence of a 'loss triggering event1 over the lime window for which estimation was done. A 'loss triggering event' is defined as one which does not exist at the point of lime when estimation of credit losses is done but which may occur over the time horizon for which estimation is done and has significant impacts on the actual losses in a portfolio. Not all 'loss triggering events' (such as natural disasters, epidemics etc.) can be identified, but some class of events can be predicted. This paper discusses a conceptual framework for identifying the impact of the crash of an asset price bubble (a specific type of 'loss triggering events') on the loss distribution function of the bank's portfolio. Ignoring the chances of crash in underlying asset prices, result in under predicting the provisions for a bank.
- Subjects
GLOBAL Financial Crisis, 2008-2009; LEASES; BUSINESS forecasting; FINANCIAL institutions; BANK failures
- Publication
IFIMs Focus: The International Journal of Management, 2017, Vol 13, Issue 2, p20
- ISSN
0973-9165
- Publication type
Article