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Modeling of Cash Flows from Nonperforming Loans in a Commercial Bank

Srečko Devjak

Abstract


The purpose of this paper is to derive a model for calculation of maturities and
volumes of repayments that a bank may expect from nonretail nonperforming
loans (hereafter NPLs). Expected inflows from nonretail NPLs follow a probability
distribution, defined by size and timing of historic repayments of NPLs. Empirical
analysis has shown that probability distribution of expected inflows from nonretail
NPLs considerably deviates from symmetric distribution and is asymmetric to the
right. Accuracy of derived model depends upon available data in banks about
NPLs by corporate sectors and recovery rates by time intervals. The model in this
paper is in interest of any bank and in particular of banks with a higher fraction
of NPLs in their loan portfolio. Contribution of this paper to the added value in
the area of liquidity risk management in banks is high because the remaining
literature does not deliver other models for the same purpose.


Keywords


bank, liquidity risk, cash flow modeling, credit risk, non-performing loans

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