Going downturn - Risk.net

Michael Barco
01 Aug 2007

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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 compensate for this deficiency, downturn LGD estimates are required to be used as an input to the model

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