Recovery Risk - The Next Challenge in Credit Risk Management

Incisive Media, June 2005, Pages: 364

In this ground-breaking new title, we bring 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.

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.

Author biography

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.

Contributors
Edward I. Altman, Stern School of Business, New York University; Andrea Resti, Bocconi University, Milan; Andrea Sironi, Bocconi University, Milan; Brooks Brady, Standard & Poor's; Ali Chabaane, ACAConsulting; William H. Chew, David Citron, Cass Business School, City University, London; Giacomo De Laurentis, Bocconi University, Milan; Jean Dermine, INSEAD; Klaus Düllmann, Deutsche Bundesbank; Craig Friedman, Standard & Poor's; Jon Frye, Federal Reserve Bank of Chicago; Greg M. Gupton, Moody's KMV; Pierpaolo Grippa, Banca d'Italia; Matthias Hagmann, University of Geneva and FAME; Simonetta Iannotti, Banca d'Italia; Esa Jokivuolle, Bank of Finland; Steven S. Kerr, Standard and Poor's; Jean-Paul Laurent, ISFA Acturial School, University of Lyon; Marie-Paule Laurent, Centre Emile Bernheim (Solvay Business School – Université Libre de Bruxelles); Fabrizio Leandri, Gruppo Banca Monte dei Paschi; Iain Maclachlan, ANZ Banking Group Limited; Cristina Neto de Carvalho, School of Economics and Management, Universidade Catolica Portuguesa (UCP); Olivier Renault, Citigroup Global Markets; Marco Riani, University of Parma; Julien Salomon, BNP Paribas CIB, Paris; Sven Sandow, Standard & Poor's; Olivier Scaillet HEC Geneva and FAME; Mathias Schmit, Leaseurope and Solvay Business School; Til Schuermann, Federal Reserve Bank of New York; Monika Trapp, University of Mannheim; Mike Wright, Nottingham University Business School.

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

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