The impact of discount rate choice in estimating the workout LGD for corporate and retail portfolios

The chapter focuses on the workout approaches, and the aim is to study the relevance of discount rate choice in determining LGD estimates.Using a proprietary database of clients of a leading financial intermediary in Italy over a 20-year time horizon, we compare workout LGD estimates released using different discount rates. The results show that there is a difference between the LGDs computed using different discount rates, especially if the median value and the percentile distribution are taken into account, whereas, looking at the determinants of the LGD estimates, the drivers are unchanged when the different hypotheses about the discount rate are tested