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SAMPLE REDESIGN FOR THE FDIC’S ASSET VALUATION REVIEW David W. Chapman Federal Deposit Insurance Corporation For Pres PowerPoint Presentation
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SAMPLE REDESIGN FOR THE FDIC’S ASSET VALUATION REVIEW David W. Chapman Federal Deposit Insurance Corporation For Presentation at the Third International Conference on Establishment Surveys Montreal, Quebec, Canada June 18-21, 2007. Introduction

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slide1
SAMPLE REDESIGN FOR THE

FDIC’S ASSET VALUATION REVIEW

David W. Chapman

Federal Deposit Insurance Corporation

For Presentation at the

Third International Conference on Establishment Surveys

Montreal, Quebec, Canada

June 18-21, 2007

slide2
Introduction
  • The FDIC insures deposits for up to $100,000.
  • Therefore, the FDIC tracks the financial

soundness of banks

  • If a bank fails, the FDIC, as the receiver of the assets, attempts to sell these assets ASAP
    • This requires pricing asset (loan) pools
    • Pool prices based on a prob. sample of loans
  • The process of selecting a sample of loans, reviewing them, and pricing loan pools, is the Asset Valuation Review (AVR)
slide3
Introduction (continued)
  • An AVR has to be done quickly
  • For about 15 years, have used software called RAVEN (Risk Analysis and Value EstimatioN)
    • Uses FoxPro software
    • RAVEN is being rewritten
  • Allows sampling methodology to be revised
  • Organization of presentation
    • Summary of current sampling methodology
    • Recommended sampling changes
    • Assessment of recommended changes
    • Final recommendations/additional research.
slide4
Current Sampling Methodology
  • Basic design: Stratified random sample
  • Strata defined by
    • Loan type (about 8 or 9 pools)
    • Loan size in terms of book value (large/small)
  • Prior to defining size strata, the smaller loans

are removed from sampling

    • Take out loans in bottom 10% of book values
    • For these, the sample recovery rate is applied
    • This introduces some bias but saves resources
slide5
Current Sampling Methodology (continued)
  • Remaining loans in a pool put into 2 size classes
    • Iterative procedure: increments of 1% of loans
    • For each split, derive ni needed to achieve a specified

precision target for estimating the total book value (as a proxy for recovery value) for each size class

    • Take split that yields the minimum n (=n1+n2)
  • RAVEN allows a choice of three precision levels
    • High: Estimate total book value

to w/n ± 10% w. 95% confidence

    • Medium: to w/n ± 15% w. 90% confidence
    • Low: to w/n ± 20% w. 80% confidence
slide6
Recommended Sampling Methodology Changes
  • Introduce a certainty stratum
    • Since not using PPS sampling,

no obvious way to define certainties

    • Try simple approaches based on

book value coverage (10%, 15%)

  • Increase the number of strata
    • In general, more strata improve precision
    • Recommend either two or three

noncertainty strata

slide7
Recommended Sampling Methodology Changes (cont.)
  • Revise methodology for defining strata
    • Cochran (1977) discusses methods for

defining optimum strata

      • Equalize WhSh across strata

(Dalenius and Gurney, 1951)

      • Equalize Wh (yh – yh-1) (Ekman, 1959)
      • These methods require “trial and error”
      • Cum Sq. Root of f rule

(Dalenius and Hodges, 1959)

        • Basically for grouped data
    • Have looked at some more recent references
      • These seem to be iterative or require assumptions
    • Tested simpler methods based on equalizing

the sum of book values, or square roots

slide8
Recommended Sampling Methodology Changes (continued)
  • Derive total n differently, based on

precision target for entire pool

  • Revise available precision levels
    • High: ± 5% with 95% confidence
    • Medium: ± 10% with 95% confidence
    • Low: ± 20% with 95% confidence
slide9
Assessment of Recommended Sampling Methodology Changes
  • Certainty stratum
    • 15% cutoff worked better than 10%
    • Need a maximum number of certainty loans (5)
  • Number of size strata
    • L=3 was generally superior to L=2.
    • However, because of the requirement of nh > 1,

L=3 was not much better unless N > 15

slide10
Assessment of Recommended Sampling Methodology Changes (cont.)
  • Stratum definitions
    • Compared two simple approaches
      • Equalize the sum of book values
      • Equalize the sum of square root of book values
      • Equalizing the sum of book values worked best
    • Theoretical basis for observed conclusion
      • Cochran (1961) stated that, for optimum strata,

CV across strata approx. equal

      • This result, combined with the result that WhSh are approx. equal for optimum strata, implies

equal book value sums across strata

slide11
Final Sample Design Recommendations
  • Define a certainty stratum
    • Coverage of top 15% of book values
    • Limited to 5 loans
  • Number of Strata
    • For N ≤ 5, take all
    • For 6 ≤ N ≤ 15, define one certainty stratum and two noncertainty strata
    • For N > 15, define one certainty stratum and three noncertainty strata
  • Stratum boundaries
    • Equalize the sum of book values across strata
slide12
Final Sample Design Recommendations (continued)
  • Recommendations for future research
    • Review the method of defining certainties
    • Consider additional methods of defining strata

including iterative procedures

    • Consider basing n on the use of ratio estimation of recovery value
    • Investigate the bias and cost savings from

leaving out the bottom 10% of book values