Loss Given Default: A Backtesting Exercise

After January 2018, the new accounting standard IFRS 9 Financial Instruments was mandatory practice for all Financial Institutions. Introducing the new impairment model, which focus on expected credit losses (ECL) instead of incurred losses established previous in IAS 39 Measurement and Recognition. According to the new standard, the risk parameters involved in the computation of the ECL are required to be periodically revised. The Loss Given Default (LGD) is a risk input which represents the loss in case of a financial instrument defaults. Hence, the aim of the present report is to validate the risk input through a back testing exercise, considering statistical tests.