Going downturn
There is much debate regarding the definition of 'downturn' loss given default (LGD). In this article, Michael Barco offers an analytic approach for calculating downturn LGD so that credit risk capital is not underestimated or overestimated
In a background note by the Basel Committee on Banking Supervision (2004) on loss given default (LGD), the Committee seeks input from the financial industry on defining and quantifying 'downturn' LGD. The main reason for this requirement is that the Vasicek model (Vasicek, 2002) used in the Basel Accord does not have systematic correlation between probability of default (PD) and LGD, and to
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