PD, LGD, CF & EADPD, LGD, CF & EAD

In September 2006, Danske Bank submitted a application to the Danish FSA for approval to apply the internal rating-based method (IRB) of the new capital requirement rules for calculating risk-weighted assets regarding credit risk effective from January 1, 2008, including the use of parameters estimated in-house. In November 2007, the Danish Financial Supervisory Authority (FSA) permitted the Danske Bank Group to apply the advanced internal ratings-based (IRB) approach to calculate credit risk under the new capital requirements directive (CRD).

This implies that Danske Bank will use internal estimates for Probability of Default (PD), Loss Given Default (LGD) and the Conversion Factor (CF).

Multiplication of the PD, LGD and EAD parameters gives the expected loss on a loan (EL). The expected loss viewed in terms of the estimated maturity forms the basis for the capital requirement.

The estimation processes and data used are described below.
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The Danske Bank Group has classified customers for more than ten years. In addition, Danske Bank has for several years applied an IT strategy rooted in a shared platform supporting and managing all of the Group’s brands. As part of the preparations for CRD, the systems platform has been expanded to comprise a data warehouse, in which the Group compiles exposure and classification data for all customers. The data warehouse stores information used to estimate risk parameters.

The data warehouse provides Danske Bank with some unique benefits. For example, all customer data, definitions and product information are stored in one location, making much greater efficiency in a lot of processes, such as modelling and validation. The goal of having a shared platform and data warehouse was an essential factor for Danske Bank to be able to select the most advanced method for calculating credit risk. Acquired banks and other businesses have migrated to the central platform, thereby becoming an integral part of Danske Bank’s risk models.

The Danske Bank Group currently has loss data going back to 1980 for Realkredit Danmark’s original business units and to 1992 for Danske Bank A/S. These data are used for estimating risk parameters. The historical data available for units integrated into the Group at later dates will cover a shorter time span.

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Last updated/revised on January 31, 2008

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