Here, three elements enter into the calculation of expected credit loss: Probability of default (PD) –this is the likelihood that your debtor will default on its debts (goes bankrupt or so) within certain period (12 months for loans in Stage 1 and life-time for other loans). Loss given...
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The BIS Basel standard method for capital charge calculation is a little different. Ignoring the impact of correlation the BIS approach essentially calculates unexpected loss at 99.9% threshold, subtracts the expected loss given by multiplyingPD x LGD x EADand uses the difference as its estimat...