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.