Loans Recovery Rates

Currently, the Company works with Synectics Consulting, a leading software house, to develop a software solution for banking institutions being able to estimate the level of recovery rates of non-performing loans under key market parameters variation. Such tools are rare in the market place due to their inherent difficulty and their request for extensive customisation with respect to the economic environment to be applied.

Current economic turmoil highlighted the usefulness for such tools for financial institutions since they will be able to have a robust estimation of the medium term capital needs. The project develops an econometric model coupled with supporting software being able to input normalised banking data regarding non-performing loans.

In particular, Technovation Solutions is developing a forecasting econometric model that will quantify the Recovery Rate (RR or alternatively Loss Given Default (LGD)) of defaulted bank loans. Currently the team is investigating the scientific literature that elaborates on the subject in addition to reviewing existing commercial software packages that offer such capabilities. This endeavor is framed by the existing international directives, guidelines, regulations and administrative rules, set by the Basel II, the Capital Requirements Directive of the EU, the EBA and Cyprus Central Bank.

The aim is to develop various model variations that will accommodate the calculation of RR (usually identified as Expected-LGD) based on the Advanced Internal Ratings-based approach (A-IRB). Technovation team gives special attention on the micro- and macro- factors stemming from particularities of the data-providing bank, the country of reference and the loan portfolio characteristics.

In particular, the team aims at identifying the statistically significant factors – which are currently being recorded and monitored – that affect positively or negatively RRs. Moreover, the team is in the process of recognizing potential gaps thus suggesting potential new factors that must be recorded and monitored in the coming future. Special emphasis is also given into establish the framework and setting the methodology for recognizing and quantifying the Downturn-RR (DLGD). DLGD is of great importance given the current financial and economic conditions in the reference country as well as the EU in general, since it must be adopted by banks if it exceeds the calculated ELGD.

The entire effort belongs to the ''Filoctetes'' project, financed through the business innovation scheme set by the Ministry of Energy, Commerce, Industry and Tourism (MECIT) and co-funded by the Republic of Cyprus and the European Regional Development Fund (ERDF) of the EU .

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