Export finance also presents a very low risk for banks, with low expected losses deriving from a combination of low loss given defaults
(LGDs) and probability of defaults (PD).
Creating a centralized risk profile offers immediate insights into the assumptions behind loss given default
models, which rating scales are used, how overrides and pricing decisions are made, and month-over-month trends for key variables.
We expect many banks to calculate their credit losses using estimates of probability of default (PD) and loss given default
IRSs can be considered as risk-based inventories of individual assets of banks, either based on the loss given default
(LGD) of the facility or probability of default (PD) of the obligor, or both.
Othermethodologies used include Loss Given Default
for Speculative-GradeNon-Financial Companies in the U.S., Canada and EMEA published in June2009 and the Government-Related Issuers methodology published in July2010.
And the loss given default
will probably be very high, high enough to eliminate the ECB's capital," said Andrew Bosomworth, senior portfolio manager at asset manager Pimco.
(1) Unexpected changes in credit quality can come from changes to the likelihood of default, the exposure at default, and the loss given default
(where loss given default
is 1 minus the recovery rate).
Reserving and loss-projection methodologies are based on historical data applied to assumptions about (1) the probability of default and (2) the loss given default
This requires the senior unsecured creditor class to absorb a higher loss under Moody's Loss Given Default
Methodology," the agency said.
To generate a loss rate, the model requires a default rule, and estimates of loss given default
However, it is a concern that the probabilities of default (PD) obtained from such internal models, as well as the loss given default
(LGD) and the exposure at default (EAD), move with the cycle, being very low in good times and, suddenly, increasing sharply as the downturn or the recession arrives.