Bank loan default forecasts significantly improved, preventing underestimation of capital requirements.
An accurate forecast of loan losses is crucial for banks to make smart decisions. By analyzing loan data, researchers found ways to improve predictions of how much money will be lost if a borrower defaults. They looked at different factors like loan type and information available at default to make better estimates. Testing their ideas on a large dataset of defaulted loans, they showed that ignoring these factors can lead to banks not setting aside enough money for potential losses.