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Improvements in Loss Given Default Forecasts for Bank LoansMarc GürtlerUniversity of Braunschweig - Institute of Technology, Department of Finance Martin HibbelnUniversity of Braunschweig - Institute of Technology, Department of Finance February 8, 2011 24th Australasian Finance and Banking Conference 2011 Midwest Finance Association 2012 Annual Meetings Paper 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.
Number of Pages in PDF File: 47 Keywords: Bank loans, Credit risk, Forecasting, Loss given default, Workout process JEL Classification: G21, G28 working papers seriesDate posted: February 10, 2011 ; Last revised: June 28, 2012Suggested CitationContact Information
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