Downturn LGD: A More Conservative Approach for Economic Decline Periods

Abstract

The purpose of this paper is to identify a relevant statistical correlation between rate of default, RD, and loss given default, LGD, in a major Brazilian financial institution Retail Home Equity exposure rated using the IRB approach, so that we may find a causal relationship between the two risk parameters. Therefore, according to Central Bank of Brazil requirements, a methodology is applied to add conservatism to the estimation of the Loss Given Default parameter at times of economic decline, reflected as increased rates of default.