Downturn LGD: A More Conservative Approach for Economic Decline Periods

Mauro R. Oliveira; Armando Chinelatto Neto

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arXiv · 1408.3086

Downturn LGD: A More Conservative Approach for Economic Decline Periods

Mauro R. Oliveira·Armando Chinelatto Neto

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Abstract

The purpose of this paper is to identify a relevant statistical correlation between rate of default, RD, and loss given default, LGD, in a major Brazilian financial institution Retail Home Equity exposure rated using the IRB approach, so that we may find a causal relationship between the two risk parameters. Therefore, according to Central Bank of Brazil requirements, a methodology is applied to add conservatism to the estimation of the Loss Given Default parameter at times of economic decline, reflected as increased rates of default.

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Mauro R. Oliveira, Armando Chinelatto Neto. 2014-08-03. Downturn LGD: A More Conservative Approach for Economic Decline Periods. https://arxiv.org/abs/1408.3086

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