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Common Practices in Modeling Commercial Real Estate LGD
Global Credit Data has the largest database of defaulted Commercial Real Estate Bank Loans (CRE). CRE is defined differently in different regions. A comparison of modeling approaches identified three general categories. The degree of sophistication reflected the amount of data available to the bank: 1. Expert Judgment Models, 2. Constrained Expert Judgment Models and 3. Data Driven Haircut Models.
Further analysis of the database reveals; year of default, asset class, loan size and legal status show meaningful variations in LGD. Banks use, and plan to use, the database for Stress Testing, Benchmarking, Calibration, Challenger models and Primary modeling.