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Benjamin Galow
- 23 July 2024
- WORKING PAPER SERIES - No. 2954Details
- Abstract
- We study the sensitivity of the realised LGD to macroeconomic conditions by exploring Global Credit’s confidential dataset on observed cash flows from defaulted loans. Given the prolonged duration of loan recovery, spanning several years, and the potential for macroeconomic fluctuations during this time frame, our study explores whether the sensitivity of realised LGD to macroeconomic conditions varies based on the timing of cash flows. We find that, regardless of the cash flow timing, the sensitivity of the LGD to macroeconomic conditions is higher for real-estate secured loans than for unsecured loans. The most relevant macroeconomic variables for the secured LGD are unemployment rate and stock returns, followed by house prices and the long-term interest rate. For unsecured loans, real GDP growth and stock returns are the most relevant predictors. These results may be relevant for both micro and macroprudential policymakers by informing on the procyclicality of risk parameters and bank capital requirements.
- JEL Code
- G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G32 : Financial Economics→Corporate Finance and Governance→Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill
G33 : Financial Economics→Corporate Finance and Governance→Bankruptcy, Liquidation
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles