Risk parameter estimation: Loss Given Default (LGD)

Of the two major methodologies of LGD models, ITCB (Bankárképző) undertakes the implementation of both methodologies.

Direct LGD models

Here the focus is on the compilation of the database and the complete history of all items is processed. With good quality historical data, our proposed methodology is one where modelling can follow standard steps similar to scoring development and produce simple, easy to understand results.

Indirect LGD models

They are designed to resolve the collection process, where each component model is available for a different time horizon due to the varying quality of the underlying data. In this case, several small models are developed and the sum of these provides the final LGD estimate.

The model alternatives used are typically some form of regression model, beta regression, logistic or linear regression, or for small data sets, a simpler contingency table-based LGD model.

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Béla Öcsi
Béla ÖcsiCEObocsi@itcb.hu

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