9.5 Back-testing

Credit institutions should demonstrate via sound back-testing that the assumptions used when assessing the recoverable amount were reasonable and grounded in observed experience. In this context, credit institutions should regularly back-test their valuation history (last valuation before the exposure was classified as non-performing) against their sales history (net sales price of collateral). Depending on the size and business model of the credit institution, it should differentiate by collateral type, valuation model/approach, type of sale (voluntary/forced) and region for its back-testing process. The back-testing results should be used to determine haircuts on collateral valuations supporting exposures remaining on the balance sheet.

Alternatively, credit institutions using the advanced internal ratings based (A-IRB) approach may use secured loss given default (LGD) to determine haircuts.