6.3.2.1 Historical observation period

The historical observation period should be as broad as possible and should contain data from various periods with differing economic circumstances. For this purpose institutions should at a minimum select a historical observation period in such a way that:

• (a) the length of the historical observation period, i.e. the timespan between the oldest default considered in the RDS and the moment of the LGD estimation, covers at least the minimum length specified in Article 181(1)(j) of Regulation (EU) No 575/2013 for exposures to corporates, institutions, central governments and central banks and, for retail exposures, the period specified in Article 181(2) subparagraph 2 of that Regulation and, where applicable, Commission Delegated Regulation adopting technical standards laid down in Article 181(3)(b) of that Regulation;
• (b) it ensures that the RDS includes a sufficient number of closed recovery processes in order to provide robust LGD estimates;
• (c) it is composed of consecutive periods and includes the most recent periods before the moment of LGD estimation;
• (d) it includes the full period for which the institution is reasonably able to replicate the currently applicable definition of default;
• (e) all available internal data is considered ‘relevant’, as referred to in Articles 181(1)(j) and 181(2) subparagraph 2 of Regulation (EU) No 575/2013 and is included in the historical observation period.

In assessing whether the RDS includes a sufficient number of closed recovery processes in accordance with paragraph 147(b), institutions should take into account the number of closed recovery processes in the total number of observations.