Credit Portfolio Loss Forecasts for Economic Downturns

Financial Markets, Institutions & Instruments, Vol. 18, No. 1, 2009, pp. 1-26

29 Pages Posted: 10 Nov 2013

See all articles by Daniel Roesch

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Multiple version iconThere are 2 versions of this paper

Date Written: 2009

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 econ-ometric 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.

Keywords: Basel II, Business Cycle, Capital Adequacy, Corporate Bond, Correlation, Credit Risk, Economic Downturn, Expected Loss, Fixed Income, Loss Given Default,Probability of Default, Value-at-Risk

JEL Classification: G20, G28, C51

Suggested Citation

Roesch, Daniel and Scheule, Harald, Credit Portfolio Loss Forecasts for Economic Downturns (2009). Financial Markets, Institutions & Instruments, Vol. 18, No. 1, 2009, pp. 1-26, Available at SSRN: https://ssrn.com/abstract=2351410

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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