Credit Portfolio Loss Forecasts for Economic Downturns

Daniel Roesch and Harald Scheule
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Daniel Roesch: University of Regensburg

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: Recent studies find a positive correlation between default and loss given default rates of credit portfolios. In response, financial regulators require financial institutions to base their capital on ‘Downturn’ loss rates given default which are also known as Downturn LGDs. This article proposes a concept for the Downturn LGD which incorporates econometric properties of credit risk as well as the information content of default and loss given default models. The concept is compared to an alternative proposal by the Department of the Treasury, the Federal Reserve System and the Federal Insurance Corporation. An empirical analysis is provided for US American corporate bond portfolios of different credit quality, seniority and security.

Pages: 26 pages
Date: 2009-01-01
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Citations: View citations in EconPapers (5)

Published as: Roesch, D. and Scheule, H., 2009, "Credit portfolio loss forecasts for economic downturns", Financial Markets, Institutions and Instruments, 18(1), 1-26.

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Journal Article: Credit Portfolio Loss Forecasts for Economic Downturns (2009)
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