Rating Models and Validation - Oesterreichische Nationalbank

assets, as the danger exists that measures to maintain the value of assets may
have been neglected before the default due to liquidity constraints.
As the value of assets may fluctuate during the realization process, the primary
assessment base used here is the collateral value or liquidation value at the
time of realization. As regards guarantees or suretyships, it is necessary to check
the time until such guarantees can be exercised as well as the credit standing
(probability of default) of the party providing the guarantee or surety.
Another important component of recoveries is the cost of realization or
bankruptcy. This item consists of the direct costs of collateral realization or
bankruptcy which may be incurred due to auctioneersÕ commissions or the
compensation of the bankruptcy administrator.
It may also be necessary to discount the market price due to the limited liquidation
horizon, especially if it is necessary to realize assets in illiquid markets
or to follow specific realization procedures.
Interest Loss
Interest loss essentially consists of the interest payments lost from the time of
default onward. In line with the analysis above, the present value of these losses
can be included in the loss profile. In cases where a more precise loss profile is
required, it is possible to examine interest loss more closely on the basis of the
following components:
— Refinancing costs until realization
— Interest payments lost in case of provisions/write-offs
— Opportunity costs of equity
Workout Costs
In the case of workout costs, we can again distinguish between the processing
costs involved in restructuring and those involved in liquidation. Based on
the definition of default used here, the restructuring of a credit facility can take
on various levels of intensity. Restructuring measures range from rapid renegotiation
of the commitment to long-term, intensive servicing.
In the case of liquidation, the measures taken by a bank can also vary widely
in terms of their intensity. Depending on the degree of collateralization and the
assets to be realized, the scope of these measures can range from direct writeoffs
to the complete liquidation of multiple collateral assets. For unsecured
loans and larger enterprises, the main emphasis tends to be on bankruptcy proceedings
managed by the bankruptcy administrator, which reduces the bankÕs
internal processing costs.
7.2.2 LGD-Specific Loss Components in Retail Transactions
Depending on the type and scope of a bankÕs retail business, it may be necessary
to make a distinction between mass-market banking and private banking in this
context. One essential characteristic of mass-market banking is the fact that it is
possible to combine large numbers of relatively small exposures in homogenous
groups and to treat them as pools. This perspective does not have to cover all of
the specific characteristics of retail customers and transactions, which means
that in the case of private banking customers it may be appropriate to view loss
using approaches applied to non-retail customers.
Rating Models and Validation
Guidelines on Credit Risk Management 143