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03-11-2016 12:51 AM

I would appreciate if anybody can help with SAS base or macro formulas for calculating Basel II Capital Requirement (PD, LGD, EAD).

Many thanks

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Solution

03-11-2016
08:46 AM

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03-11-2016 01:16 AM - edited 03-11-2016 01:18 AM

Unfortunately there is no such thing as "standard" formulas for PD, LGD, and EAD. PD (Probability of Default) and LGD (Loss Given Default) are usually derived as part of complex modelling exercises on the banks own data. This often involves constructing a suite of logistic regression models for the various portfolios of loans. Each loan type may have its own dedicated model.

EAD (Exposure At Default) for a loan is often simply the maximum of the loan balance compared to the loan limit). For example, if the loan limit is $250K and the loan balance is $200K ($200K still to pay) then the EAD would be $250K. However there are also situations where a scale factor is applied to the EAD based on more accurately estimating the Exposure At Default.

Also each country's banking regulator has their own set of rules overlaid on the Basel rules as these must be taken into account.

When you want to calculate RWA, CR, and EL then there are standard formulas using PD, LGD and EAD as inputs and SAS macro can be very useful here.

SAS is a widely-used tool for Basel II Capital Requirements so you are definitely starting out on the right track.

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Solution

03-11-2016
08:46 AM

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03-11-2016 01:16 AM - edited 03-11-2016 01:18 AM

Unfortunately there is no such thing as "standard" formulas for PD, LGD, and EAD. PD (Probability of Default) and LGD (Loss Given Default) are usually derived as part of complex modelling exercises on the banks own data. This often involves constructing a suite of logistic regression models for the various portfolios of loans. Each loan type may have its own dedicated model.

EAD (Exposure At Default) for a loan is often simply the maximum of the loan balance compared to the loan limit). For example, if the loan limit is $250K and the loan balance is $200K ($200K still to pay) then the EAD would be $250K. However there are also situations where a scale factor is applied to the EAD based on more accurately estimating the Exposure At Default.

Also each country's banking regulator has their own set of rules overlaid on the Basel rules as these must be taken into account.

When you want to calculate RWA, CR, and EL then there are standard formulas using PD, LGD and EAD as inputs and SAS macro can be very useful here.

SAS is a widely-used tool for Basel II Capital Requirements so you are definitely starting out on the right track.

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03-11-2016 08:50 AM

Hi SASKiwi,

Thank you for this brilliant and comprehensive response.

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03-11-2016 06:27 PM

My pleasure. If you need any more detailed advice on this topic I'd be happy to help.