Risk's CreditRisk Summit 2005: Bottom-of-the-cycle LGD criticised

Speaking yesterday at Risk 's CreditRisk Summit USA, Bogie Ozdemir, a New York-based senior director in the risk solutions group at Standard and Poor’s, argued that Basel II’s suggested approach to defining loss-given-default (LGD) can lead to an overly conservative capital requirement.

According to Ozdemir, mean LGD would increase by 37% under the Pillar 1 approach of Basel II. The proposed bottom-of-the cycle definition of LGD was devised to compensate for the fact that the correlation between LGD and probability of default is not explicitly accounted for in the regulation.

With this bottom-of-the-cycle definition, LGD reflects the amount of regulatory capital needed during the worst-case scenario of an economic downturn.

“The bottom-of-the-cycle LGD approach significantly

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