How to Measure the Credit Risk of Housing Loans: Evidence from a Taiwanese Bank

Abstract

This paper proposes a formal methodology to gauge the credit risk of housing loans. It estimates the default probability and recovery rate endogenously, which is more detailed than previous studies. Using data from a bank in Taiwan, this study also determines whether securing loans, granting grace periods, and lending to first-time buyers influence the credit risk of housing loans. Results show that unsecured loans and housing loans with grace periods have a higher credit risk because repayment is more uncertain. Housing loans to first-time buyers may distort loan-pricing decisions. Finally, this study estimates four risk factors emphasized by the New Basel Capital Accord, including default probability, loss given default, exposure at default, and maturity.

Keywords:

• credit risk
• default probability
• housing loans
• implied recovery rate