basel ii unexpected loss formula

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basel ii unexpected loss formula

Hi does any one have the basel ii unexpected loss formula for defaulted clients in a sas code ? 



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Posts: 3,909

Re: basel ii unexpected loss formula

Are you referring to RWA (Risk-Weighted Assets)? If so the RWA for a defaulted customer/exposure is in fact 0. This is because the default has already happened and is no longer unexpected, it is entirely expected.

The EL (Expected Loss) = LGD (Loss Given Default) * EAD (Exposure at Default). LGD is a ratio between 0 and 1 and is the estimate of the proportion of EAD that the bank will lose as a result of the default.

There is an exception however if  the defaulted customer is also impaired and Specific Provisions (SP) have been allocated to cover the loss. In that case an RWA calculation can be done and SP can be deducted from the result. I don't have the calculation immediately to hand but I can supply it if you wish.

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