BASEL II and PD EAD LGD

Help banks to satisfy the three pillars of Basel II.




Pillar I: Minimum capital requirement:-

Through comprehensive end to end risk management system; banks would be able to allocate the required minimum capital for each risk



Pillar II: Supervisory review process:-

Real time monitoring of clients credit position and banks financial position through “Risk Analysis Engine”



Pillar III: Market discipline requirements-

Improved transparency, sound financial system, effective risk management and mitigation process, and disclosure of bank’s financial stability to public, through “Risk Analysis Dashboard”







PD - Probability of Default - The likelihood of a borrower to become default over a performance window after the observation point.

EAD - Exposure at Default - The outstanding balance at the time when the borrower becomes default.

LGD - Loss Given Default - The loss proportion of an exposure, e.g. EAD, after a recovery window from the time of default.



PD estimates are 1 year forward-looking probabilities of default (Default – fails to repay borrowings)

EAD estimates are a long-run default weighted average EAD; and

LGD estimates reflect economic downturn conditions

http://www.manyppt.com/05/The-New-Basel-Capital-Accord-and-Questions-for-Practice-and.html





Value at Risk (VAR) is used to measure the market risk .

VAR summarizes the likely loss in value of a portfolio over a given time period with specified probability.

Historical simulation, Model building approach, Montey Carlo simulation – are some of the VAR techniques.