Forbearance Policy in an Asset Quality Review Framework
(2014) FMS820 20141Mathematical Statistics
- Abstract (Swedish)
- The big risk topic in recent years, in the nancial industry, has been about
capital requirements. The nancial crisis in 2008 displayed several shortcoming
regarding weak capital buers in banks. After that crisis big eorts have made
sure that the capital buers have been improved drastically over Europe. Now
another issue is starting to worry nancial regulators in Europe regarding the
quality of banks assets. A major contribution to this declining asset quality is
the misuse of forbearance. When a bank is changing the terms and conditions of
the contract with a debtor because of the debtors nancial diculties it is called
that the bank is using forbearance measures. Proper use of forbearance leads to
a "win-win" situation for both... (More) - The big risk topic in recent years, in the nancial industry, has been about
capital requirements. The nancial crisis in 2008 displayed several shortcoming
regarding weak capital buers in banks. After that crisis big eorts have made
sure that the capital buers have been improved drastically over Europe. Now
another issue is starting to worry nancial regulators in Europe regarding the
quality of banks assets. A major contribution to this declining asset quality is
the misuse of forbearance. When a bank is changing the terms and conditions of
the contract with a debtor because of the debtors nancial diculties it is called
that the bank is using forbearance measures. Proper use of forbearance leads to
a "win-win" situation for both parties involved i.e. lender and debtor. Misuse
of forbearance can be value destroying for the lender, have negative impact on
the nancial stability and on long term it can place debtors in further nancial
distress.
Since the use of forbearance can have such a dramatic impact on the lender,
the debtor and the nancial system it is extremely important that banks work
actively with how they use forbearance. This thesis goal is to lay out recommendations
how a bank should structure a forbearance policy to be able to achieve
the main purpose with forbearance, maximize the loan value.
This is done by combining current regulations and a mathematical model
that is trying to evaluate the choice a bank has when a debtor is in nancial
distress. The mathematical model is divided into two models where the second
one builds on the rst model. The rst model is a stochastic process of a
debtor's sales and by using stochastic control theory an optimal time with corresponding
optimal threshold for the rm's sales can be found where the lender
should liquidate the rm. This approach gives a solid foundation to examine
how dierent rm characteristics aects the optimal timing for liquidation. By
building on the results and the foundation of model one a second model is implemented
to capture forbearance with a more realistic approach. This model
evaluate the choice a bank has to take when a debtor is in nancial distress.
The results from the mathematical models shows that forbearance is a rational
choice for a bank to grant a debtor in nancial distress. However the
complexity of forbearance also shows that lenders solely can't rely on a mathematical
model. There are simply to many dierent parameters that have to be
considered and there is no generic solution for forbearance. However, by combining
our results from the models and current regulations recommendations a
forbearance policy is outlined. These recommendations covers the most critical
areas that a bank should have in mind when approaching forbearance (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/4499065
- author
- Kylberg, Marcus and Jansson, John
- supervisor
- organization
- course
- FMS820 20141
- year
- 2014
- type
- H2 - Master's Degree (Two Years)
- subject
- language
- English
- id
- 4499065
- date added to LUP
- 2014-06-23 14:03:26
- date last changed
- 2014-06-23 14:03:26
@misc{4499065,
abstract = {{The big risk topic in recent years, in the nancial industry, has been about
capital requirements. The nancial crisis in 2008 displayed several shortcoming
regarding weak capital buers in banks. After that crisis big eorts have made
sure that the capital buers have been improved drastically over Europe. Now
another issue is starting to worry nancial regulators in Europe regarding the
quality of banks assets. A major contribution to this declining asset quality is
the misuse of forbearance. When a bank is changing the terms and conditions of
the contract with a debtor because of the debtors nancial diculties it is called
that the bank is using forbearance measures. Proper use of forbearance leads to
a "win-win" situation for both parties involved i.e. lender and debtor. Misuse
of forbearance can be value destroying for the lender, have negative impact on
the nancial stability and on long term it can place debtors in further nancial
distress.
Since the use of forbearance can have such a dramatic impact on the lender,
the debtor and the nancial system it is extremely important that banks work
actively with how they use forbearance. This thesis goal is to lay out recommendations
how a bank should structure a forbearance policy to be able to achieve
the main purpose with forbearance, maximize the loan value.
This is done by combining current regulations and a mathematical model
that is trying to evaluate the choice a bank has when a debtor is in nancial
distress. The mathematical model is divided into two models where the second
one builds on the rst model. The rst model is a stochastic process of a
debtor's sales and by using stochastic control theory an optimal time with corresponding
optimal threshold for the rm's sales can be found where the lender
should liquidate the rm. This approach gives a solid foundation to examine
how dierent rm characteristics aects the optimal timing for liquidation. By
building on the results and the foundation of model one a second model is implemented
to capture forbearance with a more realistic approach. This model
evaluate the choice a bank has to take when a debtor is in nancial distress.
The results from the mathematical models shows that forbearance is a rational
choice for a bank to grant a debtor in nancial distress. However the
complexity of forbearance also shows that lenders solely can't rely on a mathematical
model. There are simply to many dierent parameters that have to be
considered and there is no generic solution for forbearance. However, by combining
our results from the models and current regulations recommendations a
forbearance policy is outlined. These recommendations covers the most critical
areas that a bank should have in mind when approaching forbearance}},
author = {{Kylberg, Marcus and Jansson, John}},
language = {{eng}},
note = {{Student Paper}},
title = {{Forbearance Policy in an Asset Quality Review Framework}},
year = {{2014}},
}