Guidance on Paragraph 468 of the Framework Document
by Basel Committee on Banking Supervision
Introduction: Following publication of "International Convergence of Capital Measurement and Capital Standards: A Revised Framework" (the Basel II Framework Document) in June 2004, a number of interested parties including industry associations and national supervisors asked the Basel Committee on Banking Supervision (the Committee) to provide further clarification surrounding the quantification of loss-given-default (LGD) parameters used for Pillar 1 capital calculations. In particular, the Committee was asked to further elaborate on the so-called "downturn LGD" standard described in paragraph 468 of the Framework Document. This paragraph requires that estimated LGD parameters must "reflect economic downturn conditions where necessary to capture the relevant risks." The same paragraph indicates that "supervisors will continue to monitor and encourage appropriate approaches to this issue." The LGD Working Group (the Working Group) was established in September 2004 to engage in a dialogue with industry concerning appropriate approaches to meeting the requirements of paragraph 468 and to determine whether it would be useful for the Committee to provide further guidance to industry and supervisors in this area.
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The Text of Paragraph #468: