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Validation of loss given default in the advanced IRB approach

Author

Listed:
  • Guilherme Fernandes Sanches

    (BNDES)

  • André Alves Portela Santos

    (UFSC)

Abstract

The goal of our paper is to contribute to the discussion about the most important aspects of the loss given default validation process, with special attention to the brazilian case, as the Central Bank of Brazil determines in Circular no 3.648/2013. The authors suggest the application of a few non-linear statistical measures to the study of dependence between default frequency and loss given default, likeKendall ad Somers statistics and non-binary receiver operation characterisc (ROC). An estimation methodology for Downturn LGD is proposed, having as foundation a correlation adjustment derivedfrom expected loss and ordination of quantiles of the forecasted LGD distribution according to the dependence level for different credit portfolios.

Suggested Citation

  • Guilherme Fernandes Sanches & André Alves Portela Santos, 2016. "Validation of loss given default in the advanced IRB approach," Brazilian Review of Finance, Brazilian Society of Finance, vol. 14(2), pages 299-321.
    • Handle: RePEc:brf:journl:v:14:y:2016:i:2:p:299-321
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    More about this item

    Keywords

    LGD; validation; IRB approaches; credit risk; Basel Accords; ; LGD; validation; IRB approaches; credit risk; Basel Accords;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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