Recovery Risk

Book description

With default rates increasing in the current high financial contagion, a correct measurement of loss given default (LGD) and its relationship with PD becomes even more crucial.

Recovery Risk brings together three prominent editors to provide a timely reference text on loss given default (LGD) measurement and management and the requirements of the Basel II Capital Accord.

As banks and other financial institutions are struggling to pick up the backlog in implementing sound LGD estimation systems they will welcome a contribution that helps to bridge the gap between some new and advanced techniques and their current corporate culture on recovery risk.

This book explains that a thorough understanding of the systematic dimension of recovery risk (ie the ?downturn LGD’) is key to an appropriate measurement and management of credit risk. An accurate estimation of LGD can tremendously improve the way a financial institution measures credit risk.

All banks adopting Basel Compliant rating systems will have to estimate LGD, at least for their retail portfolios. Further more the book will also introduce the readers to the requirements that the New Basel Accord poses to LGD estimation, helping them to transform research results into operational tools for the setup of Basel-compliant rating systems.

This book will provide insights for: Risk Managers, Credit Officers, Quants, Professors, Accountants, Consultants, Regulators, Investment Managers and Asset Managers.

The measurement of LGD - the share of an exposure that is actually lost when a borrower defaults - is a critical area of the science of credit analysis. Topics covered include:

* Using multivariate models for the estimation of LGD

* Exploring the links between LGD and default risk

* Providing a Basel II compliant framework for LGD estimation

* Helping you to transform research results into operational tools for setting up Basel II compliant rating systems

* Full accounts of the latest developments in the field of LGD analysis.

Includes a full summary of results of academic research in LGD measurement over the past 10 years, including the latest research findings from the main empirical and theoretical academics.

Book details

ISBN

9781906348427

Publish date

1 Jun 2005

Format

Size

155mm x 235mm

Editor biography

Edward Altman, Andrea Resti and Andrea Sironi

Edward I. Altman is the Max L. Heine professor of finance at the Stern School of Business, New York University, and director of the credit and fixed income research program at the NYU Salomon Center. Edward has an international reputation as an expert on corporate bankruptcy, high yield bonds, distressed debt and credit risk analysis. He was named Laureate 1984 by the Hautes Etudes Commerciales Foundation in Paris for his accumulated works on corporate distress prediction models and procedures for firm financial rehabilitation, and awarded the Graham & Dodd Scroll for 1985 by the Financial Analysts Federation for his work on default rates and high yield corporate debt. Edward is an advisor to many financial institutions including Citigroup, Concordia Advisors, Investcorp and the New York State Common Retirement Fund, and is also on the board of the Franklin Mutual Series Funds.

Andrea Resti is an associate professor at Bocconi University, Milan, where he teaches financial institutions management. He is also the managing director of FinMonitor, a research body on bank mergers, sponsored by the University of Bergamo, with some 15 financial institutions. Andrea has acted as a scientific coordinator of a wide array of courses on bank management and risk control themes organised by SDA Bocconi, Finstudi and ABI (Italian Bankers’ Association). He has published in the Journal of Business, Journal of Banking and Finance, and the European Journal of Operational Research. Andrea’s research interests include: credit risk management and measurement; bank strategic management; bank mergers and acquisitions; investment management and private banking; and quantitative efficiency analysis for banks and multi-product organisations.

Andrea Sironi is a professor of banking and finance at Bocconi University, where he also holds the position of vice rector for graduate programs and that of director of the research division of the School of Management. Andrea has held visiting positions at the research and statistics department of the Federal Reserve Board of Governors, and at the Salomon Brothers Center (Stern School of Business, NYU). He has previously been a financial analyst at The Chase Manhattan Bank in London. His research work has been mainly in the area of banking supervision and financial risk management and has been published in major international scientific journals.

Table of contents

Introduction

Edward I. Altman; Andrea Resti, Andrea Sironi

NYU Salomon Center and NYU Stern School of Business;

Bocconi University

PART I: DEFINING AND MEASURING RECOVERY RISK

1 What Do We Know About Loss Given Default?

Til Schuermann

Federal Reserve Bank of New York and Wharton Financial

Institutions Center

2 Defining LGD: The Basel II Perspective

Andrea Resti, Andrea Sironi

Bocconi University

3 Loss Given Default: A Review of the Literature

Edward I. Altman; Andrea Resti, Andrea Sironi

NYU Salomon Center and NYU Stern School of Business;

Bocconi University

4 Estimating Recovery Risk by Means of a Quantitative Model: LossCalc

Greg M. Gupton

Moody’s KMV

5 Recovery Ratings: A Fundamental Approach to Estimating Recovery Risk

William H. Chew, Steven S. Kerr

Standard and Poor’s

PART II: MEASURING LGD ON SPECIFIC PORTFOLIOS

6 How to Measure Recoveries and Provisions on Bank Lending: Methodology and Empirical Evidence

Jean Dermine; Cristina Neto de Carvalho

INSEAD; Universidade Catolica Portuguesa

7 Recovery Rates in the Banking Industry: Stylised Facts Emerging from the Italian Experience

Pierpaolo Grippa, Simonetta Iannotti; Fabrizio Leandri

Bank of Italy; Monte dei Paschi di Siena

8 Estimating LGD in the Leasing Industry: Empirical Evidence from a Multivariate Model

Giacomo De Laurentis; Marco Riani

Bocconi University; Università degli Studi di Parma

9 Recovery Rates from Distressed Management Buy-Outs

David Citron; Mike Wright

Cass Business School; Nottingham University

Business School

PART III: THE PD/LGD CORRELATION

10 The Effects of Systematic Credit Risk: a False Sense of Security

Jon Frye

Federal Reserve Bank of Chicago

11 LGD in a Structural Model of Default

Samu Peura; Esa Jokivuolle

Sampo plc; Bank of Finland

12 The PD/LGD Link: Empirical Evidence from the Bond Market

Edward I. Altman; Brooks Brady; Andrea Resti, Andrea Sironi

NYU Salomon Center and NYU Stern School

of Business; Standard and Poor’s; Bocconi University

13 Systematic Risk in Recovery Rates of US Corporate Credit Exposures

Klaus Düllmann; Monika Trapp

Duetsche Bundesbank; University of Mannheim

14 The PD/LGD Link: Implications for Credit Risk Modelling

Edward I. Altman; Andrea Resti, Andrea Sironi

NYU Salomon Center and NYU Stern School of Business;

Bocconi University

15 Credit Risk Assessment and Stochastic LGD: An Investigation of Correlation Effects

Ali Chabaane; Jean-Paul Laurent; Julien Salomon

ACA Consulting and BNP Paribas; ISFAActuarial School,

University of Lyon and BNP Paribas; BNP Paribas

PART IV: ADVANCED METHODOLOGIES

16 Choosing the Discount Factor for Estimating Economic LGD

Iain Maclachlan

Australia and New Zealand Banking Group Ltd

17 Estimating "Distressed" LGD on Defaulted Exposures: A Portfolio Model Applied to Leasing Contracts

Marie-Paule Laurent, Mathias Schmit

Université Libre de Bruxelles, Solvay Business School

18 Estimation of Recovery Rate Densities: Non-parametric and Semi-parametric Approaches versus Industry Practice

Matthias Hagmann; Olivier Renault; Olivier Scaillet

HEC Lausanne and FAME; CitiGroup Global Markets

Ltd; HEC Genève and FAME

19 Estimating Conditional Probability Distributions of Recovery Rates: A Utility-Based Approach

Craig Friedman; Sven Sandow

Standard and Poor’s; NYU Courant Institute of

Mathematical Sciences