New proposal tackles high-risk loans to prevent financial instability
The article suggests a new way to calculate capital requirements for risky loans after the financial crisis. By using advanced models, they aim to better estimate expected and unexpected losses for defaulted loans. This method, which includes ELBE and LGD in-default parameters, helps financial institutions manage high-risk portfolios more effectively. The proposed approach is simple to implement and can be applied to common databases used by these institutions.