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Loan loss forecasting: a methodological overview

Author

Listed:
  • Gaffney, Edward

    (Central Bank of Ireland)

  • Kelly, Robert

    (Central Bank of Ireland)

  • McCann, Fergal

    (Central Bank of Ireland)

  • Lyons, Paul

    (Central Bank of Ireland)

Abstract

This Letter provides an overview of the Central Bank of Ireland's Loan Loss Forecasting framework. This framework, which utilises detailed loan-level data provided on a six-monthly basis by domestic Irish banks, includes internally- developed probability of default (PD) models and a cash ow engine which produces expected loss estimates. The PD models provide estimates of the probability of transition into and out of loan default. Exposure at Default (EAD) is calculated on an annual basis using PD estimates and loan-level information on term, interest rate and balance. Loss Given Default (LGD) is calculated using loan-level collateral value data and can be adjusted in residential mortgage models using an internally-developed algorithm which models lenders' choice between mortgage modi cation and repossession.

Suggested Citation

  • Gaffney, Edward & Kelly, Robert & McCann, Fergal & Lyons, Paul, 2014. "Loan loss forecasting: a methodological overview," Economic Letters 13/EL/14, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:13/el/14
    as

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    File URL: https://centralbank.ie/docs/default-source/publications/economic-letters/economic-letter---vol-2014-no-13.pdf?sfvrsn=12
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    References listed on IDEAS

    as
    1. Gaffney, Edward & Kelly, Robert & McCann, Fergal, 2014. "A transitions-based framework for estimating expected credit losses," Research Technical Papers 16/RT/14, Central Bank of Ireland.
    2. Kelly, Robert & O'Malley, Terence, 2014. "A Transitions-Based Model of Default for Irish Mortgages," Research Technical Papers 17/RT/14, Central Bank of Ireland.
    3. Jackson, Christopher, 2011. "Multi-State Models for Panel Data: The msm Package for R," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 38(i08).
    4. McCann, Fergal, 2014. "Modelling default transitions in the UK mortgage market," Research Technical Papers 18/RT/14, Central Bank of Ireland.
    5. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
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    Cited by:

    1. International Monetary Fund, 2016. "Ireland: Financial Sector Assessment Program: Technical Note-Macroprudential Policy Framework," IMF Staff Country Reports 2016/316, International Monetary Fund.
    2. Morell, Joe & Rice, Jonathan & Shaw, Frances, 2022. "A Framework for Macroprudential Stress Testing," Research Technical Papers 7/RT/22, Central Bank of Ireland.

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