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Macroeconomic Factors as Drivers of LGD Prediction: Empirical Evidence from the Czech Republic

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Author Info

  • Konstantin Belyaev
  • Aelita Belyaeva
  • Tomas Konecny
  • Jakub Seidler
  • Martin Vojtek

Abstract

This paper focuses on key macroeconomic driving factors influencing the loss given default (LGD) - an important credit risk parameter determining credit losses of the banking sector. Various econometric approaches are applied on both individual and aggregated data for different bank segments in order to identify the sensitivity of LGD parameters to both the micro characteristics of debtors and aggregated macro-level data. Despite the relatively low importance of macro variables in the model combining micro- and macroeconomic information, our estimates suggest that the macroeconomic environment contributes directly to the variation in LGD. The results from the different approaches confirm a negative link between LGD and consumption growth for the retail portfolio, while in the case of the corporate segment, a negative link between LGD and real GDP growth is identified. Importantly, given that aggregation effects and non-linearities may substantially affect the choice of relevant macroeconomic variables, it is essential to distinguish between models employing purely macroeconomic data and models combining micro- and macro-based information.

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File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/cnbwp_2012_12.pdf
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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2012/12.

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Date of creation: Dec 2012
Date of revision:
Handle: RePEc:cnb:wpaper:2012/12

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Related research

Keywords: Credit losses; loss given default; recovery rates; work-out LGD.;

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References

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Cited by:
  1. Jiri Witzany, 2013. "Estimating Default and Recovery Rate Correlations," Working Papers IES 2013/03, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2013.

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