Forecasting bank loans loss-given-default
نویسنده
چکیده
With the advent of the new Basel Capital Accord, banking organizations are invited to estimate credit risk capital requirements using an internal ratings based approach. In order to be compliant with this approach, institutions must estimate the expected loss-given-default, the fraction of the credit exposure that is lost if the borrower defaults. This study evaluates the ability of a parametric fractional response regression and a nonparametric regression tree model to forecast bank loan credit losses. The out-of-sample predictive ability of these models is evaluated at several recovery horizons after the default event. The out-of-time predictive ability is also estimated for a recovery horizon of one year. The performance of the models is benchmarked against recovery estimates given by historical averages. The results suggest that regression trees are an interesting alternative to parametric models in modeling and forecasting loss-given-default. JEL Classifications: G17; G21
منابع مشابه
Discussant remarks on Andrew Felton and Joseph B Nichols' paper "Commercial real estate loan performance at failed US banks"
This is a very nice paper, well motivated and based on a unique dataset. Using loan-level data from community banks entering Federal Deposit Insurance Corporation (FDIC) receivership, the paper estimates the probability of default (PD) and loss-given default (LGD) of two distinct types of commercial real estate (CRE) loans. The authors also compare commercial real estate loans in community bank...
متن کامل16RT14 A transitions-based framework for estimating expected credit losses
This paper presents a framework for estimating losses for residential mortgage loans. At the core is a transitions-based probability of default model which yields directly observable cash-flows at the loan level. The estimated model includes coefficients on unemployment, Loan to Value ratio and interest rates, all of which allow a macroeconomic scenario to be fed through the model and impact lo...
متن کاملSubnational Debt of China: The Politics-Finance Nexus*
Using unique proprietary loan-level data, we provide the first comprehensive study on China’s local government debt, which was off-balance sheet. Policy and commercial banks, both of which are state owned, are the main financiers of local governments. We find that notwithstanding their prevalent nonprofit goal of raising social welfare, policy loans perform remarkably better than commercial loa...
متن کاملDownturn Loss Given Default: Mixture distribution estimation
The internal estimates of Loss Given Default (LGD) must reflect economic downturn conditions, thus estimating the “downturn LGD”, as the new Basel Capital Accord Basel II establishes. We suggest a methodology to estimate the downturn LGD distribution to overcome the arbitrariness of the methods suggested by Basel II. We assume that LGD is a mixture of an expansion and recession distribution. In...
متن کامل