Given the current situation, we move the Brown Bag Seminars to Microsoft Teams.

The next Brown Bag Seminar is scheduled for Wednesday, December 9^th, 2020, 1 p.m. - 2 p.m. via MS Teams.
The meeting will open at 13:45 a.m. for you to dial in. To join the stream please follow this link.

Our speaker will be Florian Pauer, WU Vienna. He will give a talk on "Sell or Hold? On the Value of Non-Performing Loans and Mandatory Write-Off Rules"

Abstract: This paper investigates the decision that rational banks face when they consider selling a non-performing loan (NPL). We start with developing a risk neutral pricing model for non-performing loans and show that even if a bank and a potential  buyer agree on the expected recovery value a difference in the precision in the estimation of the drift of the underlying recovery process may greatly influence the decision to sell an NPL. This difference could be due to private information of the bank about the borrower’s loan history or due to a larger sample of similar borrowers where defaults can be observed. Furthermore, the question if it is optimal to hold on to an NPL is also affected by capital requirements and funding costs banks typically face. This is of particular interest in the light of mandatory write-off policies, which basically force banks to write-off/provision for NPLs after some time has passed. This raises the question whether or not banks are incentivized to sell NPLs at prices that are too low and thus represent a wealth transfer from banks to other capital market participants. Given the results presented here it can be concluded that mandatory write-off rules would indeed lead to the aforementioned transfer and that such policies could be refined to incorporate a bank’s ability to estimate time-series properties of an NPL’s underlying recovery rate process.