What Is a Global Recovery Rate?

"Global recovery rate" can refer to businesses recovering fraud-related losses or to loan facilities that are recoverable given a borrower's default. In the first instance, the term is used in the anti-fraud field referring to the proportion of businesses recovering their fraud-related losses. In the second sense, the term refers to the proportion of a borrower's lending facilities that are recoverable if that borrower defaults.

Key Takeaways

  • The global recovery rate is the amount of a loan that a business recovers after a borrower has defaulted.
  • The global recovery rate also refers to the amount businesses recover after experiencing losses through fraud-related activities.
  • In regards to fraud-related losses for businesses, implementing procedures such as business crime insurance, early detection, and code of conduct practices can prevent and help recover losses.
  • Banks calculate exposure at default (EAD) to determine how much they will lose if a borrower defaults.

Understanding a Global Recovery Rate

According to PricewaterhouseCoopers's 2020 Global Economic Crime Survey, 47% of firms experienced some form of economic crime over the previous two years. Early detection of fraudulent activities and acquiring business crime insurance are two of the best methods of increasing the likelihood of recovering stolen assets.

Global recovery rate when related to loan losses is used in the field of credit and banking and is usually expressed as a percentage of the exposure at default (EAD). EAD is the total potential loss a bank may face if a borrower defaults.

With a term loan, this exposure may be minimal because payments are fixed and limited to a given term. Other lending facilities, however, may be more open-ended and therefore present a greater risk. The global recovery rate is also defined as a complement to the loss given default (LGD).

Global Recovery Rate and Fraud

Fraud is so widespread that according to the Association of Certified Fraud Examiners' (ACFE's) 2020 Global Study on Occupational Fraud and Abuse, there were 2,504 cases of occupational fraud in 125 countries for a total of more than $3.6 billion in losses. The median loss per case was $125,000 and the average loss per case was $1,509,000. Small businesses experienced more losses than larger businesses, by almost double the amount, and corruption was the main reason for the fraud schemes.

More than half of fraud cases are not recovered. Statistics reveal that the larger the monetary value of the fraud, the less likely it is that the entire loss value will be recovered. According to the 2018 report by the Association of Certified Fraud Examiners (ACFE), losses of $10,000 or less had a 30% chance of the total value being recovered, losses between $101,000 and $1 million had a 13% chance of the total value being recovered, while losses of $1 million or more had an 8% chance of the total value being recovered. 

This is, of course, if the company or individual that experienced the loss actually discovers the loss. The ACFE shows that the best way to discover fraud is through tips, which was 43% of the time, followed by internal audits and then management reviews.

Recovery of losses most often happens only if the victim legally reports the loss, which has been decreasing over the last few years. Reasons that organizations do not want to report a loss include fear of bad publicity, the belief that internal discipline is sufficient, legal action is too costly, and lack of evidence.

Global Recovery Rate and Loans

When a loan has been made by a bank the borrower is responsible for paying the entire amount back, with interest, over a certain period of time. When a borrower defaults on the loan and cannot pay it back, this is severely damaging to the borrower. The global recovery rate, or more commonly, the recovery rate, is the value of the loan that the lender can recover.

The main reason a borrower defaults on their loan is because they don't have the financial means to pay it. This happens more often when the economy is weak or in a recession. If the borrower is unemployed, cannot find a job, or whose salary is not increasing while their costs are, will experience financial hardship. The same theory applies to a business that is not selling enough during a weak economy.

In 2019, there were 119 global corporate defaults, of which the majority were non-investment grade companies.

Most often a change in a borrower's circumstances is hard to predict when the economy turns from a strong one to a weak one; however, banks do aim to mitigate their risk on defaults by thoroughly investigating a borrower before extending credit.

This is primarily done through evaluating their creditworthiness by looking at their credit score and credit history, as well as other financial information, such as savings, investments, etc.

The global recovery rate will vary depending on the type of debt. Secured debt will almost always be recovered because there is collateral backing the loan. If the borrower defaults, for example on their mortgage, the lender has the right to seize the collateral, in this case, the house, and sell it to pay off the loan.