The Sensitivity of the Loss Given Default Rate to Systematic Risk: New Empirical Evidence on Bank Loans
Posted: 12 Jul 2008
We verify the existence of a relation between loss given default rate (LGDR) and macroeconomic conditions by examining 11,649 bank loans concerning the Italian market. Using both the univariate and multivariate analyses, we pinpoint diverse macroeconomic explanatory variables for LGDR on loans to households and SMEs. For households, LGDR is more sensitive to the default-to-loan ratio, the unemployment rate, and household consumption. For SMEs, LGDR is influenced by the total number of employed people and the GDP growth rate. These findings corroborate the Basel Committee's provision that LGDR quantification process must identify distinct downturn conditions for each supervisory asset class.
Keywords: Loss given default rate, Bank loans, Systematic risk, New Basel Capital Accord
JEL Classification: G21, G28
Suggested Citation: Suggested Citation