The Pooled Approach for LGD estimation

Abstract

The aim of the elaborate is to present the advantages and disadvantages of the Pooled Approach for the estimation of the Loss Given Default (LGD). The parameter estimates the percentage of loss to be associated with the single relations on the basis of the information observed during the entire period from the date of entry to the end of the suffering date. Firstly, the document presents an historical excursus concerning the regulatory environment for banks and financial institutions. The presentation starts from the foundation of the Basel Committee in order to conclude with the very recent proposal known as Basel IV, describing the specific requirements to own-LGD estimates, according to the Article 181 of the Capital Requirements Regulation (CRR). Furthermore, during the paper a Loss Given Default (work-out type) Model will be developed following the Pooled Approach, based on data contributed by a pool of banks. At the end of the work a comparison between the Bank Specific Approach and the Pooled Approach, that will underline pros and cons of the two, will be presented.