Abstract
In western countries, curtailment is not a popular payment behavior, but it is the dominant form of prepayment in Taiwan. Previous curtailment literatures were mainly focused on its factors and probability. However, by using a sample of over 10 years mortgage performance records from a Taiwan’s commercial bank, This paper examines the impact of mortgage curtailment behaviors on the subsequent default performance and the empirical result indicates that cumulative curtailment is significantly negative correlated with default. With the advent of New Basel II Accord, banks in Taiwan are expected to follow it by the end of 2006. Consequently, banks which intend to apply for the advanced internal ratings-based approach (IRB) must take curtailment behavior into account. Otherwise, ignorance of the curtailment information would lead to a biased result of estimating the probability of default (PD). In so doing, banks could set up tailored risk weights further, and enhance their internal credit risk management.