Forecasting loss given default of bank loans with multi-stage model

Probability of default (PD) and loss given default (LGD) are key risk parameters in credit risk management. The majority of LGD research is based on the corporate bond market and few studies focus on the LGD of bank loans even in Japan because of the lack of available public data on bank loan losses. Consequently, knowledge concerning Japanese bank loan LGD is scarce. This study uses Japanese bank loan data to analyze the influencing factors of LGD and to develop a (multi-stage) model to predict LGD and expected loss (EL). We found that collateral, guarantees, and loan size impact LGD. Further, we confirmed that our multi-stage LGD model has superior predictive accuracy than the corresponding OLS model, Tobit model and Inflated beta regression model.