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Improvements in loss given default forecasts for bank loans

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  • Gürtler, Marc
  • Hibbeln, Martin

Abstract

An accurate forecast of the parameter loss given default (LGD) of loans plays a crucial role for risk-based decision making by banks. We theoretically analyze problems arising when forecasting LGDs of bank loans that lead to inconsistent estimates and a low predictive power. We present several improvements for LGD estimates, considering length-biased sampling, different loan characteristics depending on the type of default end, and different information sets according to the default status. We empirically demonstrate the capability of our proposals based on a data set of 69,985 defaulted bank loans. Our results are not only important for banks, but also for regulators, because neglecting these issues leads to a significant underestimation of capital requirements.

Suggested Citation

  • Gürtler, Marc & Hibbeln, Martin, 2013. "Improvements in loss given default forecasts for bank loans," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2354-2366.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2354-2366
    DOI: 10.1016/j.jbankfin.2013.01.031
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank loans; Credit risk; Forecasting; Loss given default; Workout process;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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