IDEAS home Printed from https://ideas.repec.org/p/cbi/ecolet/13-el-14.html
   My bibliography  Save this paper

Loan loss forecasting: a methodological overview

Author

Listed:
  • Gaffney, Edward

    (Central Bank of Ireland)

  • Kelly, Robert

    (Central Bank of Ireland)

  • McCann, Fergal

    (Central Bank of Ireland)

  • Lyons, Paul

    (Central Bank of Ireland)

Abstract

This Letter provides an overview of the Central Bank of Ireland's Loan Loss Forecasting framework. This framework, which utilises detailed loan-level data provided on a six-monthly basis by domestic Irish banks, includes internally- developed probability of default (PD) models and a cash ow engine which produces expected loss estimates. The PD models provide estimates of the probability of transition into and out of loan default. Exposure at Default (EAD) is calculated on an annual basis using PD estimates and loan-level information on term, interest rate and balance. Loss Given Default (LGD) is calculated using loan-level collateral value data and can be adjusted in residential mortgage models using an internally-developed algorithm which models lenders' choice between mortgage modi cation and repossession.

Suggested Citation

  • Gaffney, Edward & Kelly, Robert & McCann, Fergal & Lyons, Paul, 2014. "Loan loss forecasting: a methodological overview," Economic Letters 13/EL/14, Central Bank of Ireland.
    • Handle: RePEc:cbi:ecolet:13/el/14
    as

    Download full text from publisher

    File URL: https://centralbank.ie/docs/default-source/publications/economic-letters/economic-letter---vol-2014-no-13.pdf?sfvrsn=12
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gaffney, Edward & Kelly, Robert & McCann, Fergal, 2014. "A transitions-based framework for estimating expected credit losses," Research Technical Papers 16/RT/14, Central Bank of Ireland.
    2. Jackson, Christopher, 2011. "Multi-State Models for Panel Data: The msm Package for R," Journal of Statistical Software, Foundation for Open Access Statistics, vol. 38(i08).
    3. McCann, Fergal, 2014. "Modelling default transitions in the UK mortgage market," Research Technical Papers 18/RT/14, Central Bank of Ireland.
    4. Kelly, Robert & O'Malley, Terence, 2014. "A Transitions-Based Model of Default for Irish Mortgages," Research Technical Papers 17/RT/14, Central Bank of Ireland.
    5. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. International Monetary Fund, 2016. "Ireland: Financial Sector Assessment Program: Technical Note-Macroprudential Policy Framework," IMF Staff Country Reports 2016/316, International Monetary Fund.
    2. Morell, Joe & Rice, Jonathan & Shaw, Frances, 2022. "A Framework for Macroprudential Stress Testing," Research Technical Papers 7/RT/22, Central Bank of Ireland.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gaffney, Edward & Kelly, Robert & McCann, Fergal, 2014. "A transitions-based framework for estimating expected credit losses," Research Technical Papers 16/RT/14, Central Bank of Ireland.
    2. Morell, Joe & Rice, Jonathan & Shaw, Frances, 2022. "A Framework for Macroprudential Stress Testing," Research Technical Papers 7/RT/22, Central Bank of Ireland.
    3. McCann, Fergal, 2014. "Modelling default transitions in the UK mortgage market," Research Technical Papers 18/RT/14, Central Bank of Ireland.
    4. Kelly, Robert & O'Toole, Conor, 2016. "Lending Conditions and Loan Default: What Can We Learn From UK Buy-to-Let Loans?," Research Technical Papers 04/RT/16, Central Bank of Ireland.
    5. Gaffney, Edward & McCann, Fergal, 2019. "The cyclicality in SICR: mortgage modelling under IFRS 9," ESRB Working Paper Series 92, European Systemic Risk Board.
    6. Tsiropoulos, Vasilis, 2018. "A Vulnerability Analysis for Mortgaged Irish Households," Financial Stability Notes 02-18, Central Bank of Ireland.
    7. Kelly, Robert & McCann, Fergal, 2015. "Households in long-term mortgage arrears:lessons from economic research," Economic Letters 11/EL/15, Central Bank of Ireland.
    8. International Monetary Fund, 2016. "Ireland: Financial Sector Assessment Program: Technical Note-Nonbank Sector Stability Analyses," IMF Staff Country Reports 2016/317, International Monetary Fund.
    9. Gaffney, Edward & McCann, Fergal, 2018. "The cyclicality in SICR: mortgage modelling under IFRS 9," Research Technical Papers 16/RT/18, Central Bank of Ireland.
    10. Kelly, Robert & O’Toole, Conor, 2018. "Mortgage default, lending conditions and macroprudential policy: Loan-level evidence from UK buy-to-lets," Journal of Financial Stability, Elsevier, vol. 36(C), pages 322-335.
    11. Slaymaker, Rachel & O'Toole, Conor & McQuinn, Kieran & Fahy, Mike, 2018. "Monetary policy normalisation and mortgage arrears in a recovering economy: The case of the Irish residential market," Papers WP613, Economic and Social Research Institute (ESRI).
    12. Kelly, Robert & O’Malley, Terence, 2016. "The good, the bad and the impaired: A credit risk model of the Irish mortgage market," Journal of Financial Stability, Elsevier, vol. 22(C), pages 1-9.
    13. Joyce, John & McCann, Fergal, 2016. "Model-based estimates of the resilience of mortgages at origination," Economic Letters 09/EL/16, Central Bank of Ireland.
    14. Tsiropoulos, Vasilis, 2018. "A Vulnerability Analysis for Mortgaged Irish Households," Financial Stability Notes 2/FS/18, Central Bank of Ireland.
    15. Kelly, Jane & Mazza, Elena, 2019. "Mortgage servicing burdens and LTI caps," Financial Stability Notes 13/FS/19, Central Bank of Ireland.
    16. Kelly, Robert & O'Malley, Terence, 2014. "A Transitions-Based Model of Default for Irish Mortgages," Research Technical Papers 17/RT/14, Central Bank of Ireland.
    17. Nguyen, Thu Ha & Lan, Yihui & Treepongkaruna, Sirimon & Zhong, Rui, 2023. "Credit rating downgrades and stock price crash risk: International evidence," Finance Research Letters, Elsevier, vol. 55(PB).
    18. Pesaran, M. Hashem & Schuermann, Til & Treutler, Bjorn-Jakob & Weiner, Scott M., 2006. "Macroeconomic Dynamics and Credit Risk: A Global Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(5), pages 1211-1261, August.
    19. Qiu, Qinjing & Kawai, Reiichiro, 2022. "A decoupling principle for Markov-modulated chains," Statistics & Probability Letters, Elsevier, vol. 182(C).
    20. Schechtman, Ricardo, 2013. "Default matrices: A complete measurement of banks’ consumer credit delinquency," Journal of Financial Stability, Elsevier, vol. 9(4), pages 460-474.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cbi:ecolet:13/el/14. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fiona Farrelly (email available below). General contact details of provider: https://edirc.repec.org/data/cbigvie.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.