Definition of economic loss and realised LGD

The concepts of economic loss and realised LGD are the basis for LGD estimation and any differences in the calculation may lead to significantly different and non-comparable LGD estimates. Therefore, it was considered essential to specify these concepts in detail, including the treatment of fees, interest and additional drawings after default, discounting rate, and costs. The specification was based on the definitions included in the CRR, but provides more detailed clarifications on the practical application of these definitions.

In particular, additional clarification is provided on the calculation of realised LGD for the observations that returned to non-defaulted status. It is considered that an assumption that these cases are always related to zero loss would not be prudent. Instead, institutions should calculate the loss realised on these exposures in the same manner as for all other defaulted observations, with the only difference being that an artificial cash flow is added to the calculation in the amount of the outstanding obligation at the moment of the return to non-defaulted status. Therefore, for the purpose of calculating the realised LGD, the exposure that returned to non-defaulted status would be treated in the same manner as if it was fully repaid at the date of the change of status.

The additional artificial cash flow should be discounted to the moment of default in the same manner as all other cash flows. This not only will ensure consistency with the fully repaid observations, but is also consistent with the concept of discounting factor, which reflects uncertainty around the cash flows on defaulted exposures that existed at the moment of default.

1. Overview

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

3. Related Standards

• EBA - Published by the European Banking Authority at https://www.eba.europa.eu/