Bank Valuation and Value Based Management: Deposit and Loan Pricing, Performance Evaluation, and Risk, 2nd Edition, 2nd Edition

CHAPTER 14

Loss Given Default and Provisions on Nonperforming Loans

In the Basel II internal ratings–based (IRB) approach, a formula is used to compute capital adequacy. One of its inputs is a measure of the loss given default (LGD). That is, at the time of default, what is the expected loss on a nonperforming loan? A directly related issue is the estimate of provisions on nonperforming loans that should be recognized by the bank in its financial statements at the time of default and after the default date. Estimates of loss given default and provisions on nonperforming loans are discussed in this chapter. Chapter 15 argues that provisions also ...