Basel II Risk Requirements LGD

Basel II Credit Risk Requirements, LGD and EAD

Basel II Loss Given Default

The Credit Risk Exposure Data requirements are:

· Credit Exposure: represents the on or off balance sheet amount or market value of the underlying asset on the "as at" date of the data extract in currency.

· Gross Average Exposure (GAE): is the numeric average exposure (up to 1 year or maturity whichever is soonest) as calculated by the EAD Credit Risk Model.

· Exposure At Default (EAD): a measure of forward exposure (in currency) as calculated by a Basel Credit Risk Model for the period of 1 year or until maturity whichever is soonest. This value is calculated taking account of the underlying asset, forward valuation, facility type and commitment details. This value does not take account of guarantees, collateral or security (i.e. ignores Credit Risk Mitigation Techniques with the exception of on-balance sheet netting where the effect of netting is included in EAD).

· Effective Maturity: Is the contractual maturity of the facility/transaction which will be either:

o The maximum remaining time over which the Obligor could take to fully discharge its contractual obligation (principal, interest and fees) under a loan; or

o A weighted maturity taking account of any pre-determined amortisation schedule.

The effective maturity will be used in the IRB Advanced approach therefore is only applicable to the "Corporate" segment.

· Loss Given Default (LGD): is a weighting that represents the proportion of EAD that will be lost if default occurs. It is derived within a Credit Risk Model by taking account of any collateral or security that applies to the transaction/facility and the degree of Subordination of a facility.

· Probability of Default (PD) for the Corporate segment: the Probability of Default is calculated using the following steps:

o Analyse the credit risk aspects of the counterparty;

o Map the counterparty to an internal risk grade which has an associated PD: and

o Determine the facility specific PD. This last step will gives a weighted Probability of Default for facilities that are subject to a guarantee or protected by a credit derivative. The weighting takes account of the PD of the guarantor or seller of the credit derivative.

· Probability of Default (PD) for the "Other" segment: is derived from a credit scoring process for a new customer and behavioral scoring for existing business. The resulting PD is mapped to an internal risk grade.

basel ii operational risk