S&P launches loss estimation tool

Calculation of LGD enables banks to better understand their potential loss for a particular exposure in the event of a default. "Loss-given default estimates are a key requirement of Basel II, said Roy Taub, global head of Standard & Poor's Risk Solutions. “They are an essential component of a sound credit risk management process," he added.

In addition to its use in bank internal ratings systems, the tool is aimed at securitisation specialists and investors. It can be used for exposures encompassing a variety of collateral, industries and subordinations of debt.

The US version of the model is underpinned by a database of large corporates, with loss data from more than 2,500 defaulted obligations dating back to 1987. Inputs to the model include collateral type, debt position, the aggregate default rate and the industry default rate.

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