35. Where institutions adopt the modelling approach specified in paragraph 31(a)(i), the unfunded …

Where institutions adopt the modelling approach specified in paragraph 31(a)(i), the unfunded credit protection may be considered as a risk driver in the rating system. In particular, it may consist in:

• (a) adjusting only the LGD estimates according to historical experience related to the observed credit risk mitigation effects of the unfunded credit protection on realised LGDs, including realised recoveries and material costs associated with exercising the unfunded credit protection;
• (b) adjusting both the PD and the LGD estimates, where institutions can provide empirical evidence that the existence of the unfunded credit protection has an impact on the PD of the obligor and demonstrate that the simultaneous adjustment of both the PD and LGD estimates does not lead to double counting effects of the unfunded credit protection or to underestimation of expected loss.

The sole adjustment of the PD estimates should be deemed inappropriate in any circumstance.

1. Overview

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

3. Related Standards

• EBA -

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