Estimates of banks' losses on loans to the corporate sector
- Ida Nervik Hjelseth, Elif Arbatli Saxegaard, Haakon Solheim and Bjørn H. Vatne
- Staff Memo
Loans to non-ﬁnancial enterprises are the main source of banks’ losses. Analyses of banks’ losses on corporate loans are therefore important in the assessment of ﬁnancial stability. This paper presents Norges Bank’s framework for estimating losses on corporate loans built up from microdata for each ﬁrm and loan in each bank. Losses are estimated using a stepwise process. First, we estimate revenue developments at industry level and simulate the eﬀect on ﬁrms’ future ﬁnancial statements. This is then used to project ﬁrms’ bankruptcy probabilities using Norges Bank’s bankruptcy probability model (KOSMO). Finally, the bankruptcy probabilities are linked to data on banks’ exposures and credit losses are estimated. The estimates will be included in Norges Bank’s assessment of vulnerabilities and risks in the Norwegian banking system. In addition to being included in a general risk assessment, the framework can be used in stress testing and in the assessment of new areas of risk, such as climate risk.
Staff Memos present reports and documentation written by staff members and affiliates of Norges Bank, the central bank of Norway. Views and conclusions expressed in Staff Memos should not be taken to represent the views of Norges Bank.
ISSN 1504-2596 (online)