Bank Loan Losses-Given-Default: A case study

by Jean Dermine of INSEAD (Fontainebleau), and
Cristina Neto de Carvalho of Universidade Catolica Portuguesa (Lisbon)

March 10, 2005

Abstract: The empirical literature on credit risk has relied mostly on the corporate bond market to estimate losses in the event of default. The reason for this is that, as bank loans are private instruments, few data on loan losses are publicly available. The contribution of this paper is to apply mortality analysis to a unique set of micro-data on defaulted bank loans of a European bank. The empirical results relate to the timing of recoveries on bad and doubtful bank loans, the distribution of cumulative recovery rates, their economic determinants and the direct costs incurred by that bank on recoveries on bad and doubtful loans.

JEL Classification: G21, G28.

Keywords: credit risk, bank loan, losses-given-default (LGD).

Published in: Journal of Banking & Finance, Vol. 30, No. 4, (April 2006), pp. 1219-1243..

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