The loss given default quantifies the loss that is expected to occur when an asset goes into default; once the foreclosure process is finished, possible recoveries are paid and collateral liquidated. It is denoted in percentage for the remaining outstanding amount.
There are different options available, each reflected in a separate component, for determining the LGD that is to be considered for a segment during ECL calculation. For different segments, various components can be applied:
- Variant A calculates the LGD on the basis of default data.
- Variant B expects the delivery of LGD from an external source.
Component 'LGD Vintage'
This component uses the workout/recovery method with consideration of macroeconomic parameters to estimate the LGD. It calculates a through-the-cycle value which is used to derive the LGD (PIT) using the appropriate macroeconomic parameters. The calculation of this component requires historical recovery data as input, including date of default, the outstanding principal on the default date and recovery amounts on a monthly basis.
Component 'LGD Mapping'
Depending on the geographical region and legal authorities, there are several sources for LGDs, e.g.
- EBA stress test table
- S&P publication by rating
- LGD in F-IRB in the Basel accord
This component maps such available LGDs provided from external sources to segments of counterparties.
The mapping is organised in a configuration table that includes segments and LGDs from external sources. The segmentation for a customer considered for this mapping should be in line with the segmentation provided by the component 'Segmentation' or delivered from a source.
If required, LGDs provided by external sources can be adjusted. For this purpose the component 'LGD Adjustment' is available.