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Incorporating Collateral Value Uncertainty in Loss Given Default Estimates and Loan‐to‐value Ratios
Author(s) -
Jokivuolle Esa,
Peura Samu
Publication year - 2003
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00222
Subject(s) - collateral , loss given default , probability of default , loan , basel ii , credit risk , economics , default , value (mathematics) , capital (architecture) , non performing loan , capital requirement , econometrics , actuarial science , business , microeconomics , mathematics , finance , statistics , archaeology , history , incentive
We present a model of risky debt in which collateral value is correlated with the possibility of default. The model is then used to study the expected loss given default, primarily as a function of collateral. The results obtained could prove useful for estimating losses given default in many popular models of credit risk which assume them constant. We also examine the problem of determining sufficient collateral to secure a loan to a desired extent. In addition to bank practitioners, regulators might find our analysis useful in reviewing banks’ lending standards relative to current collateral values. In particular, the current proposals for The New (Basel) Capital Accord involve options for the use of banks’ own loss given default estimates which might benefit from the analysis in this paper.