SAARC FINANCE,
REGIONAL SEMINAR, ISLAMABAD
36
EaD/LGD Modeling Framework
EaD Formula
EaD = Outstanding + (k
* (Limit – Outstanding))
LGD Formula
LGD% = {Max([EaD * (1 – PRR) – (CMV * CRR)] * (LGD unsec%) * (1 – Cure Rate), 0) + (LGD Add-on% * EaD)} / EaD
where:
•EaD = Outstanding + (k *
Headroom)
•k : k-factor (Credit Conversion Factor - CCF)
•Headroom : Limit - Outstanding
•PRR : Product Recovery Rate
•CMV : Collateral Market Value (for collaterals) or Nominal
amount (for guarantees)
•CRR : Collateral Recovery Rate
•LGD unsec% : Unsecured LGD% = (1 – URR) where URR is Unsecured
Recovery Rate
•LGD Add-on% : LGD floor incorporating administration cost
§As per Basel II Accord LGD (as well as other
regulatory guidelines), estimates of EaD and LGD must be appropriate for an economic downturn.