Loss given default modeling under the asymptotic single risk factor assumption

The proposals of the Basel Committee on Banking Supervision for the revision of minimum requirements for a bank's risk capital leave the quantification of loss-given-default (LGD) parameter used for capital calculation unspecified. This paper proposes a new methodology for incorporating LGD parameter explicitly into the Basel risk weight function. Numerical examples based on the new methodology are compared to the current proposals of the Basel committee on Banking Supervision.