basel II loss given default

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Loss Given Default Loss Given Default is just what it says and is an important component in the Basel ii calculation. Loss Given Default is expressed as a percentage.

So, for example, when a counterparty defaults on payment what would the loss be? Lets take an example,

If say JP Morgan lended Enron $500 million and Enron went bankrupt (as it did due to the executives incompetence incl Ken Lay) , how much would JP Morgan lose.

Well its not always $500 million, as JP Morgan may have some sort of guarantee with the Enron and may be able to reclaim some of that amount through the legal court process. Therefore, they may calculate the figure to be $300 million. The LGD would be 60%

This LGD figure would be calculated for all JP Morgans Credit Risk activities and they would get figures such as

Enron $300 million - LGD of 60%
Barings $200 million
Tyco $100 million
They would then calculate the total LGD to be $600 million. They will then use the PD and the EADto calculate their risk profile.

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