
 Forecasting Bank Loans Lossgivendefault by Joćo A. Bastos of the Technical University of Lisbon September 2009 Abstract: With the advent of the new Basel Capital Accord, banking organizations are invited to estimate credit risk capital requirements using an internal ratings based approach. In order to be compliant with this approach, institutions must estimate the expected lossgivendefault, the fraction of the credit exposure that is lost if the borrower defaults. This study evaluates the ability of a parametric fractional response regression and a nonparametric regression tree model to forecast bank loan credit losses. The outofsample predictive ability of these models is evaluated at several recovery horizons after the default event. The outoftime predictive ability is also estimated for a recovery horizon of one year. The performance of the models is benchmarked against recovery estimates given by historical averages. The results suggest that regression trees are an interesting alternative to parametric models in modeling and forecasting lossgivendefault. Keywords: Lossgivendefault, Forecasting, Bank loans, Fractional response regression, Regression trees. Published in: Journal of Banking & Finance, Vol. 34, No. 10, (October 2010), pp. 25102517. Books Referenced in this Paper: (what is this?) Download paper (281K PDF) 15 pages Related reading: Bank Loan Loss Given Default 