The Bank Retail Mortgage Lending Provisions Model And Its Applications

A partial differential equation, which represents the provision of the pool of retail loans, is investigated. Solutions which are different from that presented in Hui et al.[17] for the equation are given explicitly under certain circumstances. The provisions covering expected losses of collateralized retail lending due to default are measured by using the option approach. The analysis at the last part of the paper shows that the loan-to-value ratio, correlation between the collateral value and the probability of default, volatility of the collateral value, mean-reverting process of the probability of default and time horizon are the important factors for the provision of the pool of retail loans.