Do Economic Downturns Have an Impact on the Loss Given Default of Mobile Lease Contracts? – An Empirical Study for the German Leasing Market –

Along with the probability of default, the loss given default (LGD) is a crucial variable for the quantification of credit risks. According to the German insolvency law, lessors are allowed to access the leased asset quickly and dispose of it autonomously if the lessee encounters a default. In order to benefit from this advantage over creditors of collateralized bank loans, a reliable estimation of the LGD is of special importance for leasing companies. Using an extensive and unique data set from two major German leasing companies, we analyse the LGD of mobile lease contracts. The contribution of our paper is threefold: First, we extend the empirical evidence about the level and distribution of the LGD according to different asset types. Second, we investigate the impact of macroeconomic conditions on the aggregated LGD and propose a method how leasing companies can determine a downturn LGD for their internal risk control. Third, we address the phenomenon that contracts can “‘resurrect’” from default after some time of financial distress, which has been neglected in academic research so far. Our results suggest that the level of the LGD varies considerably depending on the asset type and that the empirical LGD distribution can be characterized by a bimodal shape. Concerning the impact of the macro-economy on the LGD, we could identify a significant relationship for vehicle leases only. Regarding the resurrection rate, we found empirical evidence for a cyclical variability in all asset categories. On the whole, the findings of our study provide useful insights for the internal credit risk management of leasing companies.