Loss Given Default for residential real estate banks: Evidence from the Euro area

Loss given default (LGD) for residential real estate loans is affected by real estate market trends due to the impact on the value of debtors’ main collateral. Banks specialized in real estate lending are expected to be better at selecting lending opportunities, properly evaluating real estate collaterals, and managing the recovery process. The recovery process is expected to differ for specialized lenders but there is no consensus about their differences from other market players. The paper examines LGD for a representative sample of European banks to underline the key differences related to real estate specialization. Results show that real estate banks, on average, perform a better recovery process. Moreover, real estate banks not fully specialized in real estate can better manage the real estate market cycle effect, reducing the pro-cyclicality of LGD