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’s 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 (LGD) parameter at times of economic decline, reflected as increased rates of default.
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