Abstract
All the relevant measures (expected losses and provisions, economic capital, regulatory capital, and interest for pricing) can be derived from one or two handful of parameters (discussed in the following sections).
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Notes
- 1.
The LGD is 100% if there are no recoveries and 0% if there is a security (mortgage) covering the whole loss amount; depending on the recoveries, the LGD is in between 0 and 100%.
- 2.
The possibilities for a less strict default definition are limited according to the Basel rules.
- 3.
Some banks experienced the problem that PDs determined by the rating tools and LGDs coming from the LGD tools did not match correctly (as PD tools and LGD tools had a different classification of exposures, for example). When it comes to pricing (see Sect. 4.1.2) this is quite a problem.
- 4.
Bank of England: Consultation Paper, CP4/13, “Credit Risk: Internal Ratings Based Approaches,” March 2013.
- 5.
See for example ECB guide to internal models—October 2019.
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Wernz, J. (2020). Risk Modeling and Capital: Credit Risk (Loans). In: Bank Management and Control. Management for Professionals. Springer, Cham. https://doi.org/10.1007/978-3-030-42866-2_4
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DOI: https://doi.org/10.1007/978-3-030-42866-2_4
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