Loss given default: towards flexible and regulatory compliant approaches

In estimating the downturn Lgd, financial intermediaries have to select the economic cycle on which investigating the relationship between default rate and recovery rate. In order to obtain the validation, the methodological framework must be detailed, sustainable and applied to a statistically significant database. The methodology selected has to consider the complexity of using the downturn correction also in the business perspective. Using multivariate models, a formalized process could be defined to evaluate the impact of economic cycle on recovery rates and danger rates used to make default rates regulatory compliant.