We explore the transition frequencies for Italian loans to small and medium size enterprises from non-performing to performing, i.e. the cure rate. The cure rate is of particular importance for the valuation and risk management of unlikely to pay (UtP) loans. We compare findings based on non-public data and research from the Bank of Italy using exposure level data from Centrale dei Rischi, the central credit register in Italy, with exposure level data from the European DataWarehouse from public SME securitisations.
The main findings are as follows. The cure rate for UtP loans is significantly different from zero even in difficult economic times like in the years 2013 to 2015 during the sovereign debt crisis. The annual probability to cure reduces with time after default with the majority of cures happening within one year. The three year probability of cure is close to the lifetime probability of cure as 90% of all cures happen within 3 years after classification to non-performing. Regional and sector effects are significant. Loans with more collateral show higher cure rates whereas the existence of one or more guarantees appears to lower the cure rate.
We understand that ESMA is currently working on revising the loan-level disclosure templates for securitisation transactions. In this article, we demonstrate how such disclosures can be used for insightful analysis that could not be obtained from pool-level performance data. We hope that ESMA will maintain the scope and consistency of the data published under the securitisation regulation going forward.
Read the full article here: Models for the cure rate of defaulted loans to small and medium enterprises in Italy.