Basel Committee clarifies 'Downturn LGDs'

The Basel Committee has issued clarification relating to the quantification of loss-given-default (LGD) parameters used for Pillar 1 capital calculations, as requested by banks and national bank supervisors. The LGD Working Group, established in September 2004, issued the guidance.

The banking industry sought clarification on the Basel II Framework's requirement that "estimated LGD parameters must reflect economic downturn conditions where necessary to capture the relevant risks".

The working Group found that "the potential for realised recovery rates to be lower than average during times of high default rates may be a material source of unexpected credit losses for some exposures or portfolios", and that failing to account for this possibility risks understating

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