Accessible Version
Examining the Relationship Between Loan Pricing and Credit Risk, Accessible Data
Figure 1. Relationship Between Origination Interest Rate Spread and Expected Default for Mortgages and Credit Cards
Scatter chart in two panels with 2005-2024 on the left and 2013-2024 on the right. The left panel is from the ICE McDash Residential Mortgage Servicing Database for jumbo mortgage loans plotting the log of expected default on log of the interest rate spread over the 10-year treasury rate. The chart shows an upward sloping relationship between the two variables with the rage of the log of expected default from -4 to 1 and the range of the log of the interest rate spread from .4 to .7. The right panel is from the FR Y-14M Schedule D: Domestic Credit Card Data and shows an upward sloping relationship between the log of expected default and the log of interest rate spread. The range of the log of expected default is from 0 to 4 and the range of the log of interest rate spread is approximately 2.9 to 3.
Note: Mortgage data is from the ICE McDash dataset for 1.25 million fixed-rate jumbo loans for the period 2005-2024. The Jumbo Mortgage Loans X axis is the bin-scatter of the log of predicted default from a model of mortgage defaults on loan attributes including indicators for ranges of credit score, LTV, and origination quarter. The interest spread is the origination interest rate over the 10-year treasury rate. Mortgage default captures adverse termination events such as foreclosures. Credit card data is for 284,914 credit card loans from supervisory Y-14M Credit Card schedule for the period 2013–2024. The Credit Card Loans X axis is the bin-scatter of the log of predicted default from a model of credit card defaults on loan attributes including linear and quadratic parametrizations of credit score and origination quarter. The interest spread is the origination purchase APR over the prime rate. Credit card default is defined as more than 90 days past due.
Source: ICE McDash Residential Mortgage Servicing Database, FR Y-14M Schedule D: Domestic Credit Card Data.
Figure 2. Relationship Between Interest Rate Residual and Lagged Regional Default
Scatter charts in three panels from 2013-2024. Each scatter point is from the Fr Y-14M Schedule D: Domestic Credit Card Data and is the median of a binned set of three-digit zip codes given by their average interest spread residual and lagged default rate in an observation quarter. Panel (i) in the top left corner, which includes year by quarter effects only when calculating the interest rate residual, shows an upward sloping relationship between lagged default rate and the interest rate residual starting from approximately 0 to 15 on the lagged default rate axis and from -.5 to 1 on the interest rate residual axis. Panel (ii) on the upper right, which includes the addition of credit score to the calculation of the interest rate residual, shows a similar range of data but the slope is flatter. Panel (iii) on the bottom left, which includes the addition of region effects to the calculation of the interest rate residual, shows the same range of data but the slope is now flat to slightly negative.
Note: Credit card data is for 284,914 credit card loans from the supervisory Y-14M Credit Card schedule for the period 2013–2024. Each point represents the median of a binned set of three-digit zip codes given by their average interest rate residual and lagged default rate in an observation quarter. The lagged default rate is the nine-quarter lagged default rate of all credit cards originated in the three-digit zip code within the last nine quarters that had defaulted by the observation quarter. The interest rate residual is the residuals from a model of credit card APR pricing on different sets of controls by panel. Panel (i) includes year by quarter of origination only. Panel (ii) adds in credit score linear and quadratic effects. Panel (iii) adds in three-digit zip code effects. Region quarter pairs are included provided there are at least 100 credit card accounts within that region quarter.
Source: FR Y-14M Schedule D: Domestic Credit Card Data.
Figure 3. Average Interest and Fee Income and Average Net Charge-offs (2008-2019)
Scatter plot using the Q4 snapshot from 2008-2019. Data is from the FR Y-9C Consolidated Financial Statements for Holding Companies at the bank level with the average of the net charge-off rate and average of the interest income rate spread over the prime rate. Both averages are logged. The scatter shows a linear trend of the points starting approximately at a level of 4 on the log net charge-off axis to 16, and then from approximately 10 on the log of interest income to around 20. There is a linear line of best fit through the scatter plot.
Note: Data is from the Y-9C plotting the log of total interest and fee income above the prime rate against the log of net charge-offs for 586 banks with more than a billion dollars in total loan assets. Observations are from the Q4 snapshot from 2008 to 2019.
Source: FR Y-9C Consolidated Financial Statements for Holding Companies.