Journal of Risk Model Validation

Risk.net

Loss given default modeling: an application to data from a Polish bank

Marek Karwański, Michał Gostkowski and Piotr Jałowiecki

  • We presented the outline of the Analytical Base Table for LGD calculations.
  • We have concluded that the multilogit model is better for LGD estimates than beta-reg.
  • We proposed the Monte-Carlo all-subset selection method to reduce generic LGD model.

ABSTRACT

Basel II allows banks to determine capital requirements using an internal ratings-based (IRB) approach. Under the IRB approach, one of the key parameters in the regulatory capital formula is loss given default (LGD). This paper compares two methods of estimating LGD: a beta regression model and a multinomial logit (MNL) model. The calculations were conducted for overdrafts of small and medium enterprises using data provided by a Polish bank. The results indicate that the MNL model is better for modeling LGD than the beta regression model.

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