2018/04/19 by Hong Wang, Catherine Forbes, Wang, Hong +5
Business, Management and Accounting · Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Corporate Finance and Governance #Credit Risk and Financial Regulations #FOS: Economics and business #Risk Management (q-fin.RM)
paper · pdf · doi:10.48550/arxiv.1804.07022
openalex publication_date 2018/04/19 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
We find that factors explaining bank loan recovery rates vary depending on\nthe state of the economic cycle. Our modeling approach incorporates a two-state\nMarkov switching mechanism as a proxy for the latent credit cycle, helping to\nexplain differences in observed recovery rates over time. We are able to\ndemonstrate how the probability of default and certain loan-specific and other\nvariables hold different explanatory power with respect to recovery rates over\n`good' and `bad' times in the credit cycle. That is, the relationship between\nrecovery rates and certain loan characteristics, firm characteristics and the\nprobability of default differs depending on underlying credit market\nconditions. This holds important implications for modelling capital retention,\nparticularly in terms of countercyclicality.\n