What is the loss of default?

Loss due to the default value measures the amount of the loss that the bank suffers when one of its debtors does not pay a loan. This amount is not automatically measured in terms of the amount of money that is not repaid because the bank could have a collateral that can alleviate the loss. Since this is the case, banks often measure loss at the default value or LGD as a percentage of loss compared to the amount of potential exposure to loss. Banks usually deal with the overall LGD of all their combined loans, rather than worry about it on the first basis after the first basis. Although it is a fact of life in banking business, banks must still be responsible for these losses and make sure that these losses will not be too great in their operations. The loss of Given Default is one way to measure these losses.

The key concept of loss at the default value is to understand thatChozi values ​​cannot simply be measured in terms of the amount of money that was originally borrowed. Almost every loan that the bank grants requires a collateral to include the debtor. This can come in the form of commercial or residential properties, companies that the debtor could own, or other assets that the bank could require as a default insurance. Therefore, there is rarely a case where the bank loses its entire loan.

For a simplified example, imagine that $ 1,000,000 banking loans in the US (USD). The company gives a building that is its base of operations worth $ 750,000, which is collateral to ensure a loan. If the company drops before it can make any of the loans installments, the bank can get back part of its capital by holding the building. Thus, the loss set in this particular situation would be $ 1,000,000 minus $ 750,000 USD, which would bring $ 250,000, or 25 percent of the original loan.

It is important to realize that kaThe bank uses its own specific formula to determine the loss at the default value. Each bank takes into account the scope of the collateral, which allows the specifics of its clientele, its position on the market and other factors specific to the place to find out how much the percentage of loss is acceptable. This percentage is usually measured in terms of the entire loss and exposure of the bank when all loans are measured.