The document summarizes research on modeling and predicting ultimate loss-given-default (LGD) on bonds and loans. It discusses issues in LGD measurement, reviews theoretical and empirical credit risk models, and presents alternative econometric models to estimate LGD including a beta link generalized linear model. The research finds leverage, profitability, and market factors are associated with lower LGD, while contractual features like seniority and collateral impact LGD. Modeling LGD at both the obligor and instrument level improves performance.

1. Understanding and Predicting Ultimate Loss-Given-Default on Bonds and Loans Michael Jacobs, Ph.D., CFA Senior Financial Economist – Credit Risk Modeling Risk Analysis Division Washington, DC 20219 Presentation to the FMA Annual Meeting 10/19/07 [email_address] The views expressed herein are solely those of the author and do not reflect necessarily the policies or procedures of the Office of the Comptroller of the Currency or of the US Department of the Treasury. Comptroller of the Currency Administrator of National Banks

17. Table 1 - Characteristics of LGD Observations by Default Type and Availability of Financial Statement Data (S&P and Moody's Rated Defaults 1985-2006)

21. Table 2 - LGD, Dollar Loss, Duration and Court Filing of Defaulted Instruments and Obligors by Cohort Year (S&P and Moody's Rated Defaults 1985-2006)

38. Model Performance Comparison: BLGLM Single vs. FIML 2-Equation (cont’d)

39. Model Performance Comparison: BLGLM Single vs. FIML 2-Equation (cont’d)