Addressing Probationary Period within a Competing Risks Survival Model for Retail Mortgage Loss Given Default

20 Pages Posted: 6 Sep 2017

See all articles by Richard Wood

Richard Wood

Lloyds Banking Group

David Powell

Principality Building Society

Date Written: September 4, 2017

Abstract

This paper builds on the established two-stage modeling framework for retail mortgages in which loss given default is computed as the product of property possession given default probability and loss given possession. In deriving the former, previous studies have suffered from a lack of clarity in their definitions of the post default outcomes of “cure” (no loss) and “possession” (some loss). The present study remedies this through the use of competing risks survival analysis, where to cure requires completion of a probationary period in which accounts return to nondefault status only when the ability to make repayments is demonstrated for a certain number of consecutive months (a recent regulatory requirement of the European Banking Authority). For loss given possession the distribution of survival time until this event can be conveniently used to appreciate the discounting of future receivables from property sale.

Keywords: loss given default, competing risks, survival analysis, retail mortgage, regulatory capital

Suggested Citation

Wood, Richard and Powell, David, Addressing Probationary Period within a Competing Risks Survival Model for Retail Mortgage Loss Given Default (September 4, 2017). Journal of Credit Risk, Vol. 13, No. 3, 2017. Available at SSRN: https://ssrn.com/abstract=3031845

Richard Wood (Contact Author)

Lloyds Banking Group ( email )

10 Gresham Street
London, EC2V 7AE
United Kingdom

David Powell

Principality Building Society ( email )

Principality Buildings, PO Box 89
Queen Street
Cardiff, CF10 1UA
United Kingdom

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