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 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.