Quarterly Studies in Banking Management and Islamic Banking

A review of Loss Given Default (LGD) estimation methods from Basel Accords perspective

Document Type : Original Article

Authors

Somayeh Mohammadi 1
Mamhmoud Botshekan 1
Ali Foroush Bastani 2

1 Department of Management, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran

2 , Department of Mathematics, Institute for Advanced Studies in Basic Sciences (IASBS), Zanjan, Iran

https://doi.org/10.22034/jifb.2024.442286.1556
Abstract
Compliance with the capital adequacy requirements provided by the Basel Committee on Banking Supervisions is one of the most vital needs of banking in Iran. In this regard, this article reviews the methods for estimating the loss given default (LGD) as one of the two main variables in determining the credit risk of a debt. This variable is used in various areas of credit risk management, including loan pricing, loss reserve determination, credit rating, and determining capital adequacy. Therefore, in this study, while reviewing the methods of estimating this variable in the various approaches in Basel accords including “fundamental internal rating” and “advanced internal rating,” the common practice that is currently used to implement the advanced internal rating approach to estimate loss given default is described in details. Also, reviewing several important studies in the field, the estimation methods used in these studies, and the results of using different statistical methods in modeling loss given default have been presented.

Keywords

Loss given default
Capital adequacy
Basel accords
Credit risk management

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