The ‘objective’ of the industry is to ensure that low default portfolios are not automatically excluded

LIBA ISDABRITISH BANKERS’ LONDON INVESTMENT BANKING INTERNATIONAL SWAPS AND ASSOCIATION ASSOCIATION DERIVATIVES ASSOCIATION Pinners Hall 6 Frederick's Place One New Change 105-108 Old Broad Street London, EC2R 8BT London, EC4M 9QQ London, EC2N 1EX Tel: 020 7796 3606 Tele: 44 (20) 7330 3550 Tel: 020 7216 8800 Fax: 020 7796 4345 Fax : 44 (20) 7330 3555 Fax: 020 721 6 8811 January 2005 Low Default Portfolios (Joint Industry Working Group Discussion Paper) This Discussion Paper looks to summarise some of the key characteristics of credit risk models currently being used to cover Low Default Portfolios. The aim of the paper is to inform discussions between regulators and firms seeking to move to an internal ratings based approach to calculating minimum regulatory capital requirements under Basel II. The industry believes that the substantial assets in LDPs should not be excluded from the IRB approach due to the absence of statistical data to establish and validate PD, LGD and EAD estimates. In an IRB approval process, the premise should therefore be, not that all portfolios meet the requirements, but that no portfolios are ruled out. Where possible we have tried to align the contents of the paper to the Basel II minimum requirements and in so doing provide a useful starting point for the dialogue between firms and regulators. The Basel II approach to the management of credit risk puts a great deal of emphasis on data and relies heavily ...