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Predicting Loan Default: How to Articulate Questions for Analysis

Laura Roberts, Hugh Blaxall, and Brian Velligan

+What are the research questions?

1. What variables predict charge-offs (when someone fails to make payments on a loan)? Can we build a predictive model that tells us the percent of loans that are charged-off under a stressed environment.

2. What is the average number of charge-off for a bank in a given month or year? What percent of all loans are charged off in a given month or year.

3. What is the average charge-off dollar amount in the bank in a given month or year?

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Is the average amount of charge-offs larger for business loans or personal loans?

Are there certain kinds of people who are more likely to default on a loan? What are their characteristics?

Are there certain businesses that are more likely to default on loans? What are their characteristics? How does one stress test a charge-off?

Is there some characteristic of a bank, or set of characteristics, that makes them more or less likely to have a lot of charge-offs?

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4. When we compare the number of charge-offs, are there more for business loans or more for personal loans?

Is the average amount of charge-offs larger for business loans or personal loans?

Are there certain kinds of people who are more likely to default on a loan? What are their characteristics? Are there personal characteristics that are correlated with the size of the loans that experience charge-offs?

Are there certain businesses that are more likely to default on loans? What are their characteristics? Are there business-level characteristics that are correlated with the size of the loans that experience charge-offs.

+What are our theoretical ideas that will help us answer the research questions? Income levels – what is the direction of the effect?

Indebtedness – individual and business, in a healthy environment, business would charge-off more, in an unhealthy environment individuals (with personal loans) would charge-off more.

Outcome business charge-offs

Predictors:

Wealth – individual and business

Interest rates, monetary policy

national deficit

state deficit

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