loss given default

However, factors such as liquidity and estimated loss given default can affect the comparison.

"Some lenders commented that they expected falling house prices to exert upward pressure on losses given default in the coming quarter," the Bank said.

The first step would be to evaluate the loan (the probability of default) and the second step involved estimating the potential loss (the loss given default).

Loss given default (LGD)

Loss given default (LGD) "magnitude of likely loss on the exposure, expressed as a percentage of the exposure"

The above assumes probability of default (PD) and Loss given default LGD are in no way correlated.

Loss Given Default is facility-specific because such losses are generally understood to be influenced by key transaction characteristics such as the presence of collateral and the degree of subordination.

These include the question of the treatment of undrawn credit card lines, recalibration in the light of the Madrid decision to move to an unexpected-loss-only approach and what is termed the 'stress loss given defaults' question.

The Bank noted that while default rates on secured loans to households in the fourth quarter had fallen, lenders' expectations of potential losses should households start to default - so-called "losses given default" - were rising.

Under F-IRB banks are required to use regulator's prescribed LGD (Loss Given Default) and other parameters required for calculating the RWA (Risk Weighted Assets).

Under the A-IRB approach and for the retail-portfolio under the F-IRB approach, the bank itself determines the appropriate Loss given default to be applied to each exposure, on the basis of robust data and analysis.

Loss Given Default or LGD is a common parameter in Risk Models and also a parameter used in the calculation of Economic Capital or Regulatory Capital under Basel II for a banking institution.

Under Basel II, banks and other financial institutions are recommended to calculate 'Downturn LGD' (Downturn Loss Given Default), which reflects the losses occurring during a 'Downturn' in a business cycle for regulatory purposes.

Thus, a bank using internal Loss Given Default estimates for capital purposes might be able to differentiate Loss Given Default values on the basis of a wider set of transaction characteristics (e.g. product type, wider range of collateral types) as well as borrower characteristics.