LOSS ESTIMATION

LOSS ESTIMATION
Models for estimating the Loss Given Default (LGD) and Credit Conversion Factor (CCF)
LOSS ESTIMATION
Models for estimating the Loss Given Default (LGD) and Credit Conversion Factor (CCF)

 

RSU provides models for estimating the Loss Given Default ratio (LGD) and the Credit Conversion Factor (CCF) for non-retail exposures and ensures the continuous validation and further development of these models. For this purpose, RSU operates a web-based system which enables users to record and quality check loss data efficiently (Loss Carrier System, LCS).

 

Areas of application

Like the probability of default the LGD is a key input for risk assessment. In fact, lenders usually loose only part, rather than all, of their claim in the event of a default. For this reason, RSU offers various models for estimating the LGD. For undrawn commitments it is also important to gauge the share of the committed amount that would have been disbursed by the time of a possible default. This ratio, referred to as the Credit Conversion Factor, is covered by RSU’s models as well.

The models are reviewed and optimised every year. They were approved for use under the Advanced IRB Approach in 2008.

Methodology

The methodology used for estimating the LGD is based on various components. These include a broad range of forecasting models for different types of collateral (real estate, securities, etc.). In addition, there are different methods for estimating the amounts recovered on unsecured claims for different customer segments (corporates, banks, etc.). The components are combined to obtain a loss ratio for an obligor or transaction.
For the development and validation of the LGD and CCF models, RSU pools the loss data recorded by client institutions.

Technology

To develop powerful models, gathering high quality information on as many loss cases as possible is crucial. For this reason RSU has developed a system for recording loss data, the LCS. One important element of this system is a set of routines for analysing data, increasing data quality, and facilitating data input. The LCS is web-based and can be easily accessed by VPN (or Crednet). Like all RSU systems it complies with the rigorous security standards customary in the banking industry. Protected transmission channels and secure data storage at a level 3-certified data processing centre ensure a high degree of data security.