Under the IRB approach ofthe Basel II Accord, an unexpected loss:
A. Might occur as a result of an economic downturn.
B. Should be part of the probability of default (PD) calculation.
C. Should be covered by loan loss provisions and interest margins.
D. Can be avoided by using historical default rates to estimate losses.
Answer:A
Losses predicted by historical default rates are expected and should be covered by loan loss provisions. Unexpected losses are unexpected variations from expected losses. An example would be the losses that arise during an economic downtum when many loans default at the same time.