Analysis Of Relevant Issues About Loss Given Default (LGD) In China

Basel Committee on Banking Supervision published the Basel II Capital Accord in June, 2004.The core of the new accord is Internal Ratings-Based approach, short of IRB, which has two key parameters: probability of default, short of PD, and loss given default, short of LGD. The IRB requires internal active banks estimate their PD and LGD according to their own assessment system on credit risk. Because of the complicacy of research structure of LGD and other external obstructions, there is lack of research on LGD, compared to PD. At home, for one thing, our bond market is not as developed as other countries; for another thing, our research on LGD started later than abroad countries, so domestic research on LGD is far insufficient. Against this backdrop, this paper wants to have a try on the research on LGD, so as to give a hand to later study.Basing on historical studies, this paper analyses the structure characteristics, influence factors and the measurement techniques of LGD .Through summing up historical studies, this paper analyses four characteristics, including its distribution, industry and guarantee and so on. Using multiple principal component analysis of large scale system, we divide the influence factors into 4 primary subsystems and select 23 variables to explain them. This method can avoid the defects of principal component analysis efficiently, and make the results more scientific and positive. In condition, we divide the LGD measurement techniques into two kinds: options model and statistical model, comparison and analysis between them make our understanding of them clearly.Of course, there are some shortcomings in this paper, for example, lack of enough data, we can not do positive analysis on LGD, and some approaches need to be further studied for their practicability.