How is the default rate calculated? The formula for calculating the default loss ratio

The subjective factors of default identification are difficult to measure, and the data is not perfect, so it is impossible to give a specific calculation method. For many, these two years have undoubtedly been a very frustrating and painful two years because of the pandemic.

Recently, how to calculate the default rate, this news has attracted the attention of many friends, and even made many people feel a little surprised, after learning about this kind of news, many friends have made guesses, in addition to the above explanation, is there any other explanation?

Probability of default is well known, the above law of the probability of default formula is of great significance, the rating determines the cost of bank borrowing, so in theory, the probability of default can improve its rating by improving the overall solvency of the bank, the probability of default, but the improvement in the default rate required to rise one level at a lower level is much higher than the improvement required at a higher level, and in the historical procedure, the volatility of the default rate.

is the standard deviation of the observed default rate for historical years.

Understand volatility because when the default rate rises, the volatility of the default probability will inevitably increase, and this fluctuation can be found in the time series of the default rate in different periods.

If volatility is high, the potential deviation of the default rate around the average level can be large, and the unexpected loss will also be high, and if the volatility is low, the deviation is small, and the unexpected loss is low, and the volatility of the default rate is the basis for measuring the unexpected loss of the loan portfolio, which is directly proportional to this standard deviation.

The uncontrollable cumulative default rate of the market does not increase proportionally over time, because for high scores, the growth will be disproportionate, for lower levels, it will be less than proportional, the longer a high-risk borrower survives, the better their risk profile will improve, and over time, a borrower with a low probability of default will be under pressure to deteriorate risk, all of these observations are extremely important to determine risk over time and assess expected and unexpected losses. <>

There are many ways to calculate it, which can be calculated by dividing the amount of default by the total amount of the loan, or by using the probability of default.

Generally, it is measured according to the party in breach of contract, and then measured by subjective factors. Generally, the default rate is calculated in this way.

It mainly depends on what you want to calculate the default rate, and you didn't make this question too clear.

The default loss rate is calculated as follows: Default loss ratio (LGD) = 1-** rate.

LGD refers to the amount of loss that the debtor will cause to the creditor once it defaults, that is, the severity of the loss. The compensation for breach of contract shall not exceed the losses that may be caused by the breach of contract that the party in breach of contract foresaw or should have foreseen at the time of entering into the contract. The default loss rate (LGD) refers to the amount of loss that the debtor will cause to the creditor once it defaults, that is, the severity of the loss.

The rate is defined as the amount divided by the amount disbursed. The ** amount here is defined as the amount recovered from the auction of collateral, enforcement of the borrower's deposit or other collection methods after the account defaults and declares it unable to repay its debts. As a result, the ratio is usually very low unless there is collateral.

In other words, the size of the default loss will depend on the characteristics of the collateral.

Its characteristics are: the default loss rate is for the transaction project - each loan, it is related to the key transaction characteristics, is linked to the credit protection of the loan, such as whether there is collateral, the bank's customers may have multiple loans, and the default loss rate of each loan is different because of its different credit protection measures.

Legal analysis: In the calculation of the loss rate for breach of contract, in addition to the liquidated damages specified in the contract, compensation should also be made according to the loss rate of the injured party.

Legal basis: Civil Code of the People's Republic of China

Article 577:Where one of the parties fails to perform its contractual obligations or its performance does not conform to the agreement, it shall bear liability for breach of contract such as continuing to perform, taking remedial measures, or compensating for losses.

Article 578:Where one of the parties expressly states or shows by its own conduct that it will not perform its contractual obligations, the other party may request that it bear liability for breach of contract before the expiration of the performance period.

Article 579:Where one of the parties fails to pay the price, remuneration, rent, or interest, or fails to perform other monetary debts, the other party may request payment from the other party.