Bank Management and Control by Johannes Wernz
Author:Johannes Wernz
Language: eng
Format: epub
Publisher: Springer Berlin Heidelberg, Berlin, Heidelberg
4.4 PD-Rating Tools and LGD-Tools
Some banks in the past few years experienced the problem that PDs determined by the rating tools and LGDs coming from the LGD tools did not match correctly (as PD tools and LGD tools had a different classification of assets, for example). When it comes to pricing (see Sect. 4.1.2) this is quite a problem. One of the reasons for the lacking match is the following: classification of assets regarding PD tools is often different from the classification of assets regarding LGD tools.
In the past, few banks put much more effort into the implementation of PD tools than into the LGD tools. Often LGD tools work only on a pool level (as an estimation of a kind of “sophisticated average value”), but not on client level – which is a problem for pricing purposes. This is also a problem for the portfolio management, as adverse selection can be a consequence (see also Sect. 4.1.1).
In the following, best practice PD and LGD tools will be discussed.
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