Global Bank Stress Test-2021-11-08-CEF
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
Decomposing Loss Rates into PDs and LGDs<br />
• Why this decomposition:<br />
o<br />
o<br />
“Spillover” to interest income (drop) via less performing business<br />
PD PiT feeds to PD TTC, to obtain risk weight impact for IRB portfolios<br />
• Simple structural model, matching broad behavioral dynamics of LGDs:<br />
Frye and Jacobs (2012, JoCR)<br />
• More complex models found to not easily outperform this model<br />
• FED DFAST uses FJ approach to imply stressed LGDs from stressed PDs<br />
• Here: to decompose loss rates to PDs and LGDs<br />
12
Change language