A new quantitative tool for modelling Loss Given Default based on both ultimate recovery and trading price values
NEW YORK, April 7, 2004- Standard & Poor’s Risk Solutions, a leading provider of integrated tools and services to help financial institutions strengthen their internal rating systems, today introduced LossStats Model, a comprehensive tool for estimating Loss Given Default, with the launch of a US version of the model.
"Loss Given Default estimates are a key requirement of Basel II and we believe that as a building block for facility rating systems they’re an essential component of a sound credit risk management process," said Roy Taub, global head of Standard & Poor’s Risk Solutions. Backed by a robust theoretical framework, LossStats Model allows banks, securitizers and investors to estimate Loss Given Default across exposures backed by a variety of collateral, across a wide range of industries, and from the most senior to most junior tranche of debt. Loss Given Default estimates help institutions understand the potential value they could lose on an exposure if it were to default.
"In leveraging our well known LossStats Database of publicly available loss data to offer a new quantitative model, we are able to help institutions enhance their internal credit and exposure management processes with loss estimates based on sound analysis of both ultimate recovery and trading prices," added Mr. Taub. "This helps them to better price, hedge and manage risk, prepare for securitization and allocate capital."
The quantitative framework for LossStats Model is based upon the Maximum Expected Utility (MEU) approach used by Risk Solutions to produce probabilistic models for decision-making investors. The US model is trained on an extensive US large corporate database with loss data from over 2,500 defaulted obligations dating back to 1987. Inputs to the model include collateral type, debt position, the aggregate default rate and the industry default rate. The model has been tested in North America by commercial and investment banks, bond insurers, and regulators.
Standard & Poor’s Risk Solutions offers a comprehensive set of Loss Given Default and Exposure at Default data, models, and services and has become a global leader in managing loss data consortia for banks that need to supplement their internal data, leading consortiums in Singapore for commercial credits, in Europe for middle market exposures and globally for project finance. Risk Solutions is building models for Loss Given Default in markets around the globe, based on these consortia, on publicly available information and on a custom basis for banks based on their own data.
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