Improvements in loss given default forecasts for bank loans

Marc Gürtler and Martin Hibbeln

Journal of Banking & Finance, 2013, vol. 37, issue 7, 2354-2366

Abstract: An accurate forecast of the parameter loss given default (LGD) of loans plays a crucial role for risk-based decision making by banks. We theoretically analyze problems arising when forecasting LGDs of bank loans that lead to inconsistent estimates and a low predictive power. We present several improvements for LGD estimates, considering length-biased sampling, different loan characteristics depending on the type of default end, and different information sets according to the default status. We empirically demonstrate the capability of our proposals based on a data set of 69,985 defaulted bank loans. Our results are not only important for banks, but also for regulators, because neglecting these issues leads to a significant underestimation of capital requirements.

Keywords: Bank loans; Credit risk; Forecasting; Loss given default; Workout process (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:7:p:2354-2366

DOI: 10.1016/j.jbankfin.2013.01.031

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