Recovery Rates in Consumer Lending: Empirical Evidence and the Model Comparison

The bank regulation embodied in the Basel II Accord has opened-up a new era in estimating recovery rates or complementary loss given default in the retail lending credit evaluation process. In this paper we investigate the properties of survival analysis models applied to recovery rates in order to predict loss given default for retail lending. We compare the results to standard techniques such as linear and logistic regressions and discuss the pros and cons of the respective methods. The study is performed on a real dataset of a major Czech bank.