Abstract
The Basel2 Accord allows banks to calculate their capital requirements using Advanced Internal Ratings Based Approach (AIRBA) based on the estimation of three credit risk parameters—Probability of Default (PD), Exposure at Default (EAD) and Loss Given Default (LGD). While on PD models an extensive academic and practitioner’s literature exists, LGD studies are in a less advance status because of the lack of data on recoveries of commercial loans: the existing literature on LGD is for the most part related to Corporate Bonds. In this paper a case study on a real Basel 2 compliant model has been developed starting from a workout approach and stressing on estimation of the discount rate as main component of Economic LGD but also on the definition of the final multivariate regressive model.
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