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Downturn LGD: A More Conservative Approach for Economic Decline Periods

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  • Mauro R. Oliveira
  • Armando Chinelatto Neto

Abstract

The purpose of this paper is to identify a relevant statistical correlation between rate of default, RD, and loss given default, LGD, in a major Brazilian financial institution Retail Home Equity exposure rated using the IRB approach, so that we may find a causal relationship between the two risk parameters. Therefore, according to Central Bank of Brazil requirements, a methodology is applied to add conservatism to the estimation of the Loss Given Default parameter at times of economic decline, reflected as increased rates of default.

Suggested Citation

  • Mauro R. Oliveira & Armando Chinelatto Neto, 2014. "Downturn LGD: A More Conservative Approach for Economic Decline Periods," Papers 1408.3086, arXiv.org.
    • Handle: RePEc:arx:papers:1408.3086
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    File URL: http://arxiv.org/pdf/1408.3086
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