Residual value risk in the leasing industry: A European case

Abstract

This paper is dedicated to recovery and residual value risks' modelling issues of automotive lease portfolios. First, loss-given-default distributions are estimated and compared for different samples based on risk drivers. Second, the residual value risk is approached through a resampling technique to provide one of the first empirical analysis on residual value losses in the automotive lease sector. Probability density function of losses and Value-at-risk measures are estimated on the basis of a private database comprising a unique set of 4828 individual automotive lease contracts issued between 1990 and 2001 by a major European financial institution. Then, a discussion is led in relation to the capital requirements related to residual value risk stemming from the Basel II Accord. As the greatest part of recovery risk is diversifiable, our conclusion is that a wider recognition of physical collateral in capital adequacy regulations should allow us to better reflect the relatively low-risk profile of automotive lease exposures.leasing, residual value risk, loss given default (LGD), Basel II Accord,

Loss given default in SME leasing

“…We do not expect a specific direction of EAD in our analysis. Pirotte and Vaessen (2008) stress that the amortization payment schedule is mostly linear and partially includes a balloon payment at maturity (see Sect. 3.2), while the value of the leased asset is convex over time.…”

“…3.2), while the value of the leased asset is convex over time. Pirotte and Vaessen (2008) and Miller (2016) show that the LGD of lease contracts decreases with a higher quotient of payments made up to the default date divided by the original lease volume. Consequently, we include Repayment Proportion and expect a negative effect on LGD as well as LGD Asset .…”

“…In the results, we replicate some findings of the earlier literature. We find, for example, a negative impact of the variable proportion of the exposure at default (EAD) to the original lease contract balance, a negative impact of the object type vehicles, and a positive impact of the work-out duration on the LGD (e.g., Schmit and Stuyck 2002;Schmit 2004;Pirotte and Vaessen 2008;Elbracht 2011; for details, see Sect. 4).…”

“…Building on the fact that recoveries of lease contracts originate from two distinct sources, liquidation proceeds and payments from the lessee and collateralization, several empirical analyses also provide a number of leasing-specific LGD determinants, but the results sometimes differ considerably in detail (for a detailed presentation of leasing LGD determinants, see Sect. 3; e.g., Schmit and Stuyck 2002;Schmit 2004;De Laurentis and Riani 2005;Pirotte and Vaessen 2008;Elbracht 2011;Miller 2016). 2 In our study, we utilize a very granular data set of 26,750 lease contracts with SMEs, containing 1156 contracts which defaulted between 2009 and 2014.…”

Perception of Residual Value Risk in Public Private Partnership Projects: Critical Review

“…As advocated by Lucko and Vorster (2003), terminology that is used to describe the concept of residual value varies widely in the literature, including market value, salvage value, resale value, and trade-in value. In accounting, the residual value can be defined as an estimated amount that an entity can obtain when disposing of an asset after its useful life has ended (Pirottea and Vaessen 2008). When doing this, the estimated costs of disposing of the asset should be deducted.…”