Macroeconomic Factors as Drivers of LGD Prediction: Empirical Evidence from the Czech Republic

Konstantin Belyaev, Aelita Belyaeva, Tomáš Konečný, Jakub Seidler, Martin Vojtek

This paper focuses on key macroeconomic driving factors influencing the loss given default (LGD) – an important credit risk parameter determining credit losses of the banking sector. Various econometric approaches are applied on both individual and aggregated data for different bank segments in order to identify the sensitivity of LGD parameters to both the micro characteristics of debtors and aggregated macro-level data. Despite the relatively low importance of macro variables in the model combining micro- and macroeconomic information, our estimates suggest that the macroeconomic environment contributes directly to the variation in LGD. The results from the different approaches confirm a negative link between LGD and consumption growth for the retail portfolio, while in the case of the corporate segment, a negative link between LGD and real GDP growth is identified. Importantly, given that aggregation effects and non-linearities may substantially affect the choice of relevant macroeconomic variables, it is essential to distinguish between models employing purely macroeconomic data and models combining micro- and macro-based information.

JEL codes: C02, G13, G33.

Keywords: Credit losses, loss given default, recovery rates, work-out LGD.

Issued: December 2012

Download: CNB WP No. 12/2012 (pdf, 438 kB)