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APRA 20% LGD floor March 6, 2007

Posted by riskopedia in Basel II, LGD, Retail Risk.
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Been reading an interesting article in Ozrisk blog
“APRA increases the cost of home loans – again”. With those risk people in the Aussie/Nz area, this shoudn’t come as a surprise when most banks are still finalising the model methodologies and outcomes.

Here is my gut feel of how APRA came to 20%:

They have done a stress test on scenario where 30% dropped in property price and its related impact to LGD and PD (you can search on google, “APRA-Insight-3rd-Quarter-2003-Stress-testing-housing-loan-portfolios.pdf”). One para there which was interested that “Historical data supplied by the mortgage insurance industry shows that Australian LGDs have a long-run average of approximately 20 per cent.The APRA model assumes that this average LGD applies to loans with an original LVR of 76 to 80 per cent. ….”

Hence, even though we have the 10% LGD floor, I will not be surprise if APRA would still insist to press on the 20% to the banks.

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