Loss Given Default

Basel Regulation

Loss-given-default (LGD) is a well known concept in the world of credit risk, gaining a ‘popularity’ boost since the introduction of Basel regulation. Together with probability of default (PD) it forms the basis in the structure of almost any modern credit risk model.

The LGD expresses the loss in case of a default as a percentage of the exposure at the moment of default (EAD)

An LGD model has to be developed when a bank chooses to report RWA and regulatory capital following the Advanced Internal Rating Based (AIRB) approach. Often it also has its place within the IFRS9 models which provide the amount of required provisions. Both for IFRS9 and AIRB, development of a regulatory compliant LGD model comes with challenges.

Challenges can vary from gathering the required data, development of a downturn methodology for AIRB to application of the maximum recovery period.

RiskQuest Experience

RiskQuest has extensive experience in both assisting and leading LGD model developments at various large and small banks and in various portfolios. Thanks to this, it is possible for us to add large value to an LGD modelling team. This can be in any of the following ways.

  • Leading / participating in the LGD modelling team
  • Data assessment for viability for regulatory compliant LGD modelling
  • Validation of an LGD model
  • Resolving findings on an LGD model after a regulatory onsight
  • Providing a modelling methodology framework
  • Access to a developed coding package specialized on risk modelling (link to riskmodelr)
  • Advice on regulatory compliance of an LGD model

If there is any interest or questions on how RiskQuest can assist you on any topic related to LGD modelling. Please contact us. If you are interested in joining our team, look here!