2.4 Computed Metrics

Based on the credit risk model, we developed and calculated several metrics, i.e. loss given default (LGD) and expected loss:

Loss given default

The loss given default (LGD) at the asset level is the amount of money that a bank or other financial institution loses when a borrower defaults on a loan. The value of the debt in the case of a default is based on a debt-restructuring model that assumes that debt holders will forgo some debt to avoid a default because debt holders will receive less if a project is liquidated.

Here, LGD is computed as the averaged loss given default for all the defaulting scenarios.

where summation is done over all the defaulting scenarios because there would still be loss even in the soft defaults, and

Expected loss

The expected loss is the probability of default (PD) times the amount of debt forgone (i.e., loss given default) in debt restructuring. We notice that the loss would still be incurred even if the debt could be restructured in every possible scenario.