With the advent of the new Basel Capital Accord, banking institutions are required to estimate credit risk capital requirements using internal ratings-based approach, subject to supervisory review. In order to be compliant with this approach, institutions must estimate the expected Loss Given Default (LGD), the fraction of the credit exposure that is lost if the borrower defaults. The flexibility to determine LGD values tailored to a bank’s portfolio will likely be a motivation for a bank to move from the foundation approach to the advanced internal ratings-based approach. This paper attempts to address key issues around LGD that are: What is LGD and what is its role in internal ratings-ba
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