{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

SC3-Chapter 20 - Managing Credit Risk on the Balance Sheet 6

SC3-Chapter 20 - Managing Credit Risk on the Balance Sheet...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
3/17/11 Loan Rates Example: Computing LGD LGD = Loss Given Default Once default has occurred, LGD includes Loss of Principal Interest Income not received Workout Expenses (collections costs, legal fees, etc.) LGD can also be expressed as [ 1 – (RCV/EAD)], where (RCV/EAD) is the Recovery Rate on the credit. The Recovery Rate is net of costs and will be dependent on whether there are loan guarantees, collateral (loan is secured), an industry factor,
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
3/17/11 LGD 22 Another way of expressing LGD is ( 29 RCVR - 1 LGD or , EAD costs of net recoveries all EAD EAD LGD since EAD costs of net recoveries all EAD LGD = - = - =
Background image of page 2
3/17/11 LGD Many banks will use the LGD computed by the ratings agency for the risk class of the bond to which the loan is mapped In our example, a loan with a risk rating of 8 is equivalent to an unsecured bond with a PD= 1.75% LGD = 50% 33
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
3/17/11 LGD The rating agencies determine PD by using their vast data on bonds to compute how many bond issues of each rating default within 1, 2, 3,…., n years The ratings agencies compute the average
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}