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The Basel II data elements of EAD, PD and LGD are used. The calculation of EAD, PD and LGD may use some additional or different inputs to the Basel II model and will be calculated in a separate set of models than the Basel II equivalents. It is recognised that there are a number of similarities to the Accord’s Advanced Approach, but there are also a number of significant differences, in particular: The Accord’s data quality requirements are higher because it is used to determine Regulatory Capital;
To satisfy the Regulator there must be a robust and clear audit trail from the Accord reports back to the underlying transaction/facility data; The Accord IRB Foundation approach uses pre-defined parameters whereas EVM makes use of internally computed values (for example, the IRB Foundation makes use of 3 LGD weightings for a loan depending on whether it is secured, unsecured or subordinated whereas EVM can use historic data on loss rates to refine this calculation); EVM capital has multiple uses (e.g. pricing) whereas the Accord is for Regulatory purposes only; The Accord necessitates increased public disclosure of the models and results; The Accord imposes constraints in terms of how additional credit risks (not captured by the Accord model) are addressed. For example, in addressing risk concentration EVM takes account of default correlation between Obligors. The Accord has a prescriptive formula of how Capital Requirements are derived from Expected Loss values.
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