Marginal PD and LGD

[Kuntos]

Hello Marek!

I refer to your work on 12-month vs Lifetime ECL.

Kindly enlighten me on how you arrive at the following:

1. Marginal PD
2. LGD

I also found that there was no consideration for macroeconomic information in arriving at ECL. Is this permitted under IFRS 9 or how should it have impacted on the result if it were there?

Many thanks for your guidance.

[Marek Muc]

Hi, PD and LGD are made up in this example to illustrate the mechanics of the impairment calculation. This is specific to a given loan portfolio so you need to come up with your own calculation of PD and LGD

I also found that there was no consideration for macroeconomic information

where do you see such a statement? It obviously should be taken into account when recognising ECL

[Kuntos]

Hi Marek, thanks for your feedback.

Please, do you have any template i can use as a guide for calculating the PD and LGD? That will be really helpful.

My reference to macro information was to ask where particularly it should have been considered.

Thanks once again and well done.

[Marek Muc]

I'm not aware of any templates, but I don't expect that any template will be useful to you as it depends on availability of data and entity specific circumstances. Do you have any historical information of defaults in your company?

Macro information mostly impacts PD (e.g. worsening macro outlook means higher PD). It can also impact LGD by impacting the value of collaterals held

[Kuntos]

Yes, i have historical information about default.

I'll attempt to develop a PD and LGD model then and come back to ask specific questions in case i encounter challenges along the way.

Thanks.