161. Institutions should calibrate their LGD estimates to the long run average LGD calculated in …

Institutions should calibrate their LGD estimates to the long run average LGD calculated in accordance with section 6.3.2. For this purpose institutions should choose a calibration method that is appropriate for their LGD estimation methodology from the following approaches:

• (a) the calibration of LGD estimates to the long-run average LGD calculated for each grade or pool, in which case they should provide additional calibration tests at the level of the relevant calibration segment;
• (b) the calibration of LGD estimates to the long-run average LGD calculated at the level of calibration segment, in particular where they use direct LGD estimates in accordance with Article 169(3) of Regulation (EU) No 575/2013, including where they use LGD estimation methodology based on intermediate parameters. In this case institutions should at least compare this long-run average LGD with the average LGD estimate applied to the same set of observations as those used for calculating the long-run average LGD and, where necessary, correct the individual LGD estimates for the application portfolio accordingly, for instance by using a scaling factor. Where realised values are higher than estimated values at the level of calibration segment, institutions should correct the estimates upwards or readjust their estimation in order to reflect their loss experience.

1. Overview

1.1 References

• Article 169 3.

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/