Discounting Recovery Rates for the Timing of Credit Recoveries

# Credit loss data (discounted)


# Credit loss data (discounted)












I am looking into a data provider which provide the `credit loss` data from different banks - https://globalcreditdata.org/interactive-dashboard/

They also provide data on something called `Discounted Recovery Rate`. Does anyone know what exactly is `discounted` RR? I know the Loss given default i.e. `LGD` hence the recovery rate. But what is the term discounted here?

Any pointer will be highly appreciated.

## Answer by Guido (score 0)

https://quant.stackexchange.com/a/70045

The recovery rate is the estimated percent of a loan or obligation that will still be repaid to creditors in the event of a default or bankruptcy.

Example:

To calculate recovery rate, one must first choose what type of group to focus on and set a time period, such as weeks, months or years.

Once a target group is identified, add up how much money was extended to it over the given time period and then add up the total sum paid back by that group.

Next, divide the total payment amount by the total amount of debt. The result is the recovery rate.

For example, during one week you extended \$15,000 in credit and received \$2,000 in payments, therefore \$2,000 / \$15,000 = 13.33% recovery rate for the week.

The term discounted means that there in an interest used to discount the actual recovery rate above

## Answer by user68318 (score 0)

https://quant.stackexchange.com/a/76234

The key thing to remember is that bankruptcy/insolvency is not an immediate process. For instance in the U.S., upon a debtor's filing of a bankruptcy petition, all creditors become subject to an automatic stay on any enforcement and collection efforts by operation of law. Remember, too, that most debt instruments have cross-acceleration and/or cross-default provisions, which act to make the principal due and payable upon the occurrence of defined Events of Default, which would generally include the commencement of a bankruptcy or insolvency proceeding. As such, any recovery (which may not come all at once) during bankruptcy necessarily deviates from the initial agreed timing of payment. You can get a sense for this from the chart in the link you initially provided, which shows both the time to Peak Recovery and to Resolution. As such, creditors' economic recovery would also conceivably include the time-value-of-money costs involved, which can be done by discounting the recovery cash flows by some interest rate. Based on the note when you hover over the "Discounted" option on the chart in the link, the use of 3-month EUIBOR as of the default date suggests the decision to use an interbank rate as a proxy for continued funding costs for the defaulted instrument.