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Downturn LGD: A More Conservative Approach for Economic Decline Periods

Mauro R. Oliveira and Armando Chinelatto Neto

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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.

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Date: 2014-08
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Published in Revista Tecnologia de Cr\'edito, Edi\c{c}\~ao 86, Editora Serasa Experian, 2014 pages 42-51

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Handle: RePEc:arx:papers:1408.3086