Is Automotive Leasing a Risky Business?

Mathias Schmit

Finance, 2005, vol. 26, issue 2, 35-66

Abstract: This paper is devoted to credit risk modelling issues of lease portfolios. It presents results on the default and loss given default performance of automotive leases and proposes specific solutions dealing with their most important characteristics including their large size, the ownership of leased assets by lessors and limited availability of information about lessees? financial situation. Probability density function of losses and VaR measures are estimated on the basis of a private database comprising a unique set of 35,861 individual automotive lease contracts issued between 1990 and 2000 by a major European financial institution. Results show that recovery rates in the automotive lease industry are high and further confirm that leasing is a relatively low-risk activity. A comparison with capital requirements stemming from the Basel Committee?s proposed new framework also show that a wider recognition of physical collateral under Basel II would not only allow to better reflect the risk profile of automotive lease exposures but would also contribute to reduce the significant gap in capital requirements stemming from the different approaches of the proposed framework.

Date: 2005
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