Loan loss forecasting: a methodological overview

Edward Gaffney, Robert Kelly, Fergal McCann () and Paul Lyons
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Edward Gaffney: Central Bank of Ireland
Paul Lyons: Central Bank of Ireland

No 13/EL/14, Economic Letters from 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.

Date: 2014-11
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