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The determinants of bank loan recovery rates in good times and bad - new evidence

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  • Hong Wang
  • Catherine S. Forbes
  • Jean-Pierre Fenech
  • John Vaz

Abstract

We find that factors explaining bank loan recovery rates vary depending on the state of the economic cycle. Our modeling approach incorporates a two-state Markov switching mechanism as a proxy for the latent credit cycle, helping to explain differences in observed recovery rates over time. We are able to demonstrate how the probability of default and certain loan-specific and other variables hold different explanatory power with respect to recovery rates over `good' and `bad' times in the credit cycle. That is, the relationship between recovery rates and certain loan characteristics, firm characteristics and the probability of default differs depending on underlying credit market conditions. This holds important implications for modelling capital retention, particularly in terms of countercyclicality.

Suggested Citation

  • Hong Wang & Catherine S. Forbes & Jean-Pierre Fenech & John Vaz, 2018. "The determinants of bank loan recovery rates in good times and bad - new evidence," Papers 1804.07022, arXiv.org.
    • Handle: RePEc:arx:papers:1804.07022
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    References listed on IDEAS

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    Cited by:

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    3. Frank Ranganai Matenda & Mabutho Sibanda & Eriyoti Chikodza & Victor Gumbo, 2021. "Determinants of corporate exposure at default under distressed economic and financial conditions in a developing economy: the case of Zimbabwe," Risk Management, Palgrave Macmillan, vol. 23(1), pages 123-149, June.
    4. Maria Patricia Durango‐Gutiérrez & Juan Lara‐Rubio & Andrés Navarro‐Galera, 2023. "Analysis of default risk in microfinance institutions under the Basel III framework," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1261-1278, April.
    5. Aleksey Min & Matthias Scherer & Amelie Schischke & Rudi Zagst, 2020. "Modeling Recovery Rates of Small- and Medium-Sized Entities in the US," Mathematics, MDPI, vol. 8(11), pages 1-18, October.
    6. Fakhrul Wahab & Majid Jamal Khan & Muhammad Yar Khan & Rukhshanda Mushtaq, 2024. "The impact of climate change on agricultural productivity and agricultural loan recovery; evidence from a developing economy," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(10), pages 24777-24790, October.

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    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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