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Credit Losses in Economic Downturns - Empirical Evidence for Hong Kong Mortgage Loans

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Author Info

  • Daniel Rosch

    (Leibniz University of Hannover)

  • Harald Scheule

    (University of Melbourne)

Abstract

Recent studies find a positive correlation between default and loss given default rates of credit portfolios. In response, financial regulators require financial institutions to base their capital on the 'Downturn' loss rate given default which is also known as Downturn LGD. This article proposes a concept for the Downturn LGD which incorporates econometric properties of credit risk as well as the information content of default and loss given default models. The concept is compared to an alternative proposal by the Department of the Treasury, the Federal Reserve System and the Federal Insurance Corporation. An empirical analysis is provided for Hong Kong mortgage loan portfolios.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 152008.

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Length: 19 pages
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:hkm:wpaper:152008

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Keywords: Basel II; Business Cycle; Capital Adequacy; Correlation; Credit Risk; Economic Downturn; Expected Loss; Fixed Income; Loss Given Default; Probability of Default; Value-at-Risk;

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  1. Mark Carey, 1998. "Credit Risk in Private Debt Portfolios," Journal of Finance, American Finance Association, vol. 53(4), pages 1363-1387, 08.
  2. Dirk Tasche, 2004. "The single risk factor approach to capital charges in case of correlated loss given default rates," Papers cond-mat/0402390, arXiv.org, revised Feb 2004.
  3. Michael B. Gordy, 1998. "A comparative anatomy of credit risk models," Finance and Economics Discussion Series 1998-47, Board of Governors of the Federal Reserve System (U.S.).
  4. Laeven, Luc & Majnoni, Giovanni, 2003. "Loan loss provisioning and economic slowdowns: too much, too late?," Journal of Financial Intermediation, Elsevier, vol. 12(2), pages 178-197, April.
  5. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
  6. Acharya, Viral V. & Bharath, Sreedhar T. & Srinivasan, Anand, 2007. "Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries," Journal of Financial Economics, Elsevier, vol. 85(3), pages 787-821, September.
  7. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
  8. McNeil, Alexander J. & Wendin, Jonathan P., 2007. "Bayesian inference for generalized linear mixed models of portfolio credit risk," Journal of Empirical Finance, Elsevier, vol. 14(2), pages 131-149, March.
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