0
$\begingroup$

A company borrows $100 million from Bank A. According to Basel II, the bank must have a certain amount of equity for this balance sheet item in order to grant the loan.

The exact amount of equity can be calculated using the IRB approach. The IRB formula depends on the parameters

  • probability of default (PD)
  • exposure at default (EaD)
  • lose given default (LGD)
  • maturity of the exposure (M)

Banks in Europe can use their intern models to compute this quantities. Does someone know what models banks use to compute this quantities? I am especially interested in the computation of PD.

$\endgroup$
0
$\begingroup$

Exact models are proprietary but they usually do that using statistical analysis. For example, in this paper the authors estimate the probability of default of various banks using the probit model. Or another example is in this paper.

Models with a limited dependent variable like probit or logit and others are quite common because these models let you estimate the probability of some event occurring. However, these models can be set up in various ways depending on data.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.