Low Default Portfolios
From Open Risk Manual
Definition
Low Default Portfolios (LDP) are certain classes of credit portfolios that due to the good credit quality of the constituents do not offer adequate historical statistics of default events to enable proper statistical modeling. Technically this can be considered as a Data Quality or Missing Data problem due to right censoring (limited observation time).
LDP's consist of sovereigns (Governments, Central Banks), institutions (Banks and other Financial Corporations) and Large Corporates as these portfolios generally contain few defaults relative to the total number of obligors[1]
Methodologies
Regulatory views on credit risk models for low default portfolios have been set out in[2]
Issues and Challenges
- There is no universal threshold for what constitutes a low default portfolio. Indicatively, across all participating institutions in the 2014 EBA exercise, on average 2.3% (simple average) of the total EAD for the LDP was in default (1.3% using an exposure-weighted average)
