Credit loss modelling using beta distribution in a Bayesian approach

Aneta Ptak-Chmielewska () and Paweł Kopciuszewski
Additional contact information
Aneta Ptak-Chmielewska: Warsaw School of Economics
Paweł Kopciuszewski: Vistula University of Warsaw, ING Hubs Poland

Bank i Kredyt, 2024, vol. 55, issue 3, 313-332

Abstract: The Advanced Internal Rating Based (AIRB) approach is more and more frequently applied by banks. Bank analysts decide to use their own approach to calculate basic risk parameters such as Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD). The problem of small samples in LGD estimation is always a challenge for researchers and analytics. The paper proposes the basic LGD model based on splitting recoveries into two classes of recoveries: close to 0 or close to 1, and based on that split the construction of the LGD model with the combination of two binary models. The main advantage of the paper is, however, addressing the unresolved cases incorporated in the LGD estimation process by using a Bayesian approach which assumes a beta distribution of further recoveries for unresolved cases. An additional advantage of the paper is that the proposed modelling approach for LGD is illustrated on real data for mortgage loans for one of the European banks.

Keywords: Loss Given Default (LGD); Bayesian approach; beta regression; unresolved cases; small sample (search for similar items in EconPapers)
JEL-codes: C1 C11 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://bankikredyt.nbp.pl/content/2024/03/bik_03_2024_04.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpbik:v:55:y:2024:i:3:p:313-332

Access Statistics for this article

More articles in Bank i Kredyt from Narodowy Bank Polski Contact information at EDIRC.
Bibliographic data for series maintained by Wojciech Burjanek ().