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.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.