Recovery rate

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The recovery rate , and rate of recovery or realization rate , English recovery rate , in is banking that part of loans , bonds or credit derivatives , the failure of the debtor ( borrower , obligor or reference entity ), including the recovery of collateral can be driven. Complement is the default loss rate .

General

In January 2007, all EU member states introduced risk parameters based on Basel II , which banks must determine from their business volume and which must comply with legal requirements. The basis in Germany was initially the Solvency Regulation , whose supervisory function has been taken over by Regulation (EU) No. 575/2013 (Capital Adequacy Regulation) (CRR), which also applies in all EU member states, since January 2014 . This knows the default volume (EaD), the default probability (PD) and the default loss rate (LGD) as risk parameters . These parameters are stochastic probability variables that help predict future developments. With the hypothetical parameters, probabilities of occurrence can be forecast. In contrast to the default volume, the recovery rate also takes into account the proceeds from the liquidation of collateral.

species

Revenue ratios can be determined with the help of different reference values . The recovery-of-firm-value relates the bankruptcy estate to the company's assets , rating agencies use the recovery-of-face-value , which relates the amount of default to the loan amount and thus comes closest to the recovery rate. The recovery of-treasure-value finally compares the loss to the value of a risk-free government bond .

scope

In addition to the probability of default and the default volume, the recovery rate is one of the three determinants of credit risk . In the case of secured loans, the recovery rate increases compared to comparable blank loans , because achievable realization proceeds are taken into account. Since most loan collateral is also subject to fluctuations in value, its future realization proceeds can only be estimated in the context of a collateral valuation. The exploitation and processing costs are to be deducted from the exploitation proceeds. Only with a small amount of collateral (such as the assignment / pledging of bank balances , life insurance and federal bonds ) are there no risks of realization, so that a recovery rate of 100% can be assumed here.

The recovery rate also plays a role with bonds and credit derivatives (as protection providers). In the case of covered Pfandbriefe , liquidation proceeds must also be taken into account, whereas credit derivatives are always unsecured.

According to Art. 4 (1) No. 55 CRR, the loss of default rate (LGD) is the amount of loss for risk positions due in the event of default by the counterparty , measured by the amount of risk positions outstanding at the time of default. According to Art. 161 Para. 1 CRR, the standard approach applies 45% for unsecured loans, 75% for subordinated loans and 11.25% for covered Pfandbriefe as the default loss rate. As a complement to the default loss rate, the recovery rate is 55% for unsecured senior loans, 25% for unsecured subordinated loans and 88.75% for covered Pfandbriefe. The Capital Adequacy Ordinance therefore assumes in the standardized approach that an average of 88.75% of the outstanding exposure can be collected from covered Pfandbriefe.

application

The recovery rate (RR) is the complementary value of the loss of default rate (LGD). It is calculated as the quotient of the net revenue in the event of default and the default volume :

If the recovery rate is 100%, a loan or a bond can be fully recovered (and a credit derivative is definitely not subject to a credit event ), so there is complete security about repayment. This is the case, for example, with loans that are fully secured by pledging bank balances. A recovery rate of 0%, on the other hand, corresponds to a total loss of the failed loan. The recovery rate already plays an important role in determining the loan price and making the loan decision . If the recovery rate falls during the term of the loan, the loan in question can be given the status of non-performing loan .

meaning

In the Capital Adequacy Ordinance, it is not the revenue ratio but the default loss ratio that is mentioned as its complementary value. The default loss rate is calculated as a regulatory risk parameter by the credit institutions (or, in the case of the standardized approach, specified by the banking supervisory authority); the revenue quota results from this as a by-product. According to a study from 2009, the recovery rate for bank loans was around 75%, while for bonds it was only 40% of the original loan amount. The higher rate of bank loans is reduced with greater opportunities to influence borrowers, for example through covenants and possible renegotiations. In the observation period between 1984 and 2003, the revenue rate in Great Britain was 92%, followed by Germany (67%) and France (56%). It was shown that the recovery rate can be significantly positively influenced by the realization of loan collateral. According to the type of collateral, the recovery rate in Germany was highest for public guarantees at 89% of the collateral value , followed by bank balances (88%), mortgages (72%), trade receivables (50%) and assignments by way of security (49%), on average 72, 9%.

As the recovery rate improves, additional credit risks can be entered into in the loan portfolio and vice versa. Outside of banking , the recovery rate can be used by non-banks in credit insurance or by debt collection companies and, organizationally, in accounts receivable .

Individual evidence

  1. ^ Helmut Keller: Recovery Rate. In: Gabler Wirtschaftslexikon. Retrieved October 31, 2018 .
  2. ↑ Darrell Duffie / Kenneth J Singleton, Modeling Term Structures of Defaltable Bonds , in: Review of Financial Studies, vol. 12, 1999, p. 687 ff.
  3. ↑ Andreas Zielke, Credit Risk Modeling and Management , in: Euroforum: Risk Management, 2005, p. 11
  4. ↑ Riskworx.com, "Recovery Rates" ( Memento of the original from September 5, 2008 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice. (December 2, 2008; PDF; 78 kB) @1@ 2Template: Webachiv / IABot / www.riskworx.com
  5. ↑ Jens Grunert / Martin Weber, Recovery Rates of Commercial Lending: Empirical Evidence for German Companies , in: Journal of Banking & Finance 33 (3), 2009, p. 505 ff.
  6. ↑ Sergej A Davydenko / Julian R. Franks, Do Bankrupty Codes matter? A Study of Defaults in France, Germany and the UK In: The Journal of Finance 63 (2), 2008, p. 582
  7. ↑ Sergej A Davydenko / Julian R. Franks, Do Bankrupty Codes matter? A Study of Defaults in France, Germany and the UK In: The Journal of Finance 63 (2), 2008, p. 586
  8. ↑ Sergej A Davydenko / Julian R. Franks, Do Bankrupty Codes matter? A Study of Defaults in France, Germany and the UK In: The Journal of Finance 63 (2), 2008, p. 587