Transcription of Preparing for Basel II Modeling Requirements - Forecasting
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Preparing for Basel II Modeling Requirements - Forecasting
As mentioned in the firstarticle in this series, thecurrent school of thoughtsurrounding the probability ofdefault (PD) and loss givendefault (LGD) models mentionedin Basel Consultative Papers isthat banks should have separatemodels for the obligor and thefacility. The obligor model shouldpredict the PD usually 90-plusdays delinquent or in foreclosure,bankruptcy, charge-off, reposses-sion, or restructuring. Models onthe facility side should predict theloss given default (LGD) or 1minus the recovery rate. In the initial article, logisticregressionwas the approach recom-mended for building PD statistical technique uses aset of explanatory variables whosevalues today would hopefully pre-dict a loan s probability of defaultsometime over the next 12months. On the LGD side, theapproach recommended was touse either linear regressionor tobitregressionto estimate the model . Directives from Basel IIParamount to using theadvanced approach as specified inthe Basel II Capital Accord is afocus on model validation.
model accuracy. Although not minimizing the importance of these other areas, for brevity’s sake the remainder of this article will focus on quantifying accuracy
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