Modelling Bank Loan LGD of Corporate and SME Segments: A Case Study
The aim of this paper is to propose a methodology to estimate loss given default (LGD) and apply it to a set of micro-data of loans to SME and corporations of an anonymous commercial bank from Central Europe. LGD estimates are important inputs in the pricing of credit risk and the measurement of bank profitability and solvency. Basel II Advance IRB Approach requires internally estimates of LGD to calculate risk-weighted assets and to estimate expected loss. We analyse the recovery rate dynamically over time and identify the efficient recovery period of a workout department. Moreover, we focus on the appropriate choice of a discount factor by introducing risk premium based on a risk level of collaterals. We apply statistical methods to estimate LGD and test empirically its determinants. Particularly, we analyse generalised linear models using symmetric logit and asymmetric log-log link functions for ordinal responses as well as for fractional responses. For fractional responses we employ two alternatives, a beta inflated distribution and a quasi-maximum likelihood estimator. We find out that the main drivers of LGD are a relative value of collateral, a loan size as well as a year of the loan origination. Different models provided similar results. As for the different links in more complex models, log-log models in some cases perform better, implying an asymmetric response of the dependent variable.
|Date of creation:||Nov 2008|
|Date of revision:||Nov 2008|
|Contact details of provider:|| Postal: Opletalova 26, CZ-110 00 Prague|
Phone: +420 2 222112330
Fax: +420 2 22112304
Web page: http://ies.fsv.cuni.cz/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Papke, Leslie E & Wooldridge, Jeffrey M, 1996.
"Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 11(6), pages 619-632, Nov.-Dec..
- Leslie E. Papke & Jeffrey M. Wooldridge, 1993. "Econometric Methods for Fractional Response Variables with an Application to 401(k) Plan Participation Rates," NBER Technical Working Papers 0147, National Bureau of Economic Research, Inc.
- Jakub Seidler & Petr Jakubík, 2009. "Implied Market Loss Given Default in the Czech Republic: Structural-Model Approach," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(1), pages 20-40, January.
- Thorburn, Karin S., 2000. "Bankruptcy auctions: costs, debt recovery, and firm survival," Journal of Financial Economics, Elsevier, vol. 58(3), pages 337-368, December.
- Olivier RENAULT & Olivier SCAILLET, 2003.
"On the Way to Recovery: A Nonparametric Bias Free Estimation of Recovery Rate Densities,"
FAME Research Paper Series
rp83, International Center for Financial Asset Management and Engineering.
- Renault, Olivier & Scaillet, Olivier, 2004. "On the way to recovery: A nonparametric bias free estimation of recovery rate densities," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 2915-2931, December.
- Radovan Chalupka & Juraj Kopecsni, 2008.
"Modelling Bank Loan LGD of Corporate and SME Segments: A Case Study,"
Working Papers IES
2008/27, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2008.
- Radovan Chalupka & Juraj Kopecsni, 2009. "Modeling Bank Loan LGD of Corporate and SME Segments: A Case Study," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 59(4), pages 360-382, Oktober.
- Dermine, J. & de Carvalho, C. Neto, 2006. "Bank loan losses-given-default: A case study," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1219-1243, April.
- Jon Frye, 2000. "Depressing recoveries," Emerging Issues, Federal Reserve Bank of Chicago, issue Oct.
- Mark Carey, 1998. "Credit Risk in Private Debt Portfolios," Journal of Finance, American Finance Association, vol. 53(4), pages 1363-1387, 08.
When requesting a correction, please mention this item's handle: RePEc:fau:wpaper:wp2008_27. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lenka Herrmannova)
If references are entirely missing, you can add them using this form.