7.1 General requirements specific to EL BE and LGD in-default estimation

Institutions that have obtained permission to use own estimates of LGD in accordance with Article 143(2) of Regulation (EU) No 575/2013, should assign an EL BE estimate and an LGD in-default estimate to each defaulted exposure within the range of application of the rating system subject to such permission.

Institutions should estimate EL BE and LGD in-default for each of the facility grades of the distinct facility rating scale or for each of the pools that are used within the rating system.

For the purposes of EL BE and LGD in-default estimation, and unless otherwise specified in this Chapter, institutions should use the same estimation methods used for estimating LGD on non-defaulted exposures, as set out in Chapter 6.

Institutions should take into consideration all relevant post-default information in their EL BE and LGD in-default estimates in a timely manner, in particular where events from the recovery process invalidate the recovery expectations underlying the most recent estimates.

Institutions should assess and duly justify situations where the estimates of LGD in-default shortly after the date of default systematically deviate from the LGD estimates immediately before the date of default at the facility grade or pool, where these deviations do not stem from the use of risk drivers that are applicable only from the date of default onwards.

Institutions should perform back-testing and benchmarking of their EL BE and LGD in-default estimates in accordance with points (b) and (c) respectively, of Article 185 of Regulation (EU) No 575/2013.

7.1.2 Reference dates

For the purposes of EL BE and LGD in-default estimation, institutions should set the reference dates to be used for grouping defaulted exposures in accordance with the recovery patterns observed. These reference dates should be used in the estimation of EL BE and LGD in-default instead of the date of default. For the purposes of setting the reference dates institutions should use information only on closed recovery processes taking into account costs and recoveries only if observed up to the date of estimation.

Each of the reference dates referred to in paragraph 171 could be any of the following:

• (a) a specific number of days after the date of default; this option would be appropriate in particular where the estimation refers to a portfolio of exposures showing a stable recovery pattern through time;
• (b) a relevant date associated with a specific event at which significant breaks in the recovery profile are observed; this option would be appropriate in particular where the estimation refers to a portfolio of exposures that are subject to significant changes of the recovery patterns associated with certain specific events, for instance at the date of realisation of collateral;
• (c) any combination of the cases referred to in points (a) and (b) that better reflects the recovery patterns; this option would be appropriate in particular where the estimation refers to a portfolio of exposures showing a stable recovery pattern through time but for which breaks in such recovery patterns are observed around certain specific events, for instance at collection, and where the reference dates following those events are defined as a specific number of days after the recovery event, rather than after the date of default;
• (d) where appropriate, the reference date can have any value between zero and the number of days until the end of the maximum period of the recovery process set by the institution for the type of exposures in question.

For the purposes of EL BE and LGD in-default estimation the same defaulted exposures in the RDS should be used at all relevant reference dates considered in the model.

Institutions should monitor on a regular basis potential changes in the recovery patterns and in the relevant recovery policies which may affect the estimation of EL BE and LGD in-default at each reference date.

7.1.3 Data requirements for EL BE and LGD in-default estimation

For the purposes of EL BE and LGD in-default estimation, institutions should use the same RDS referred to in section 6.1.2, complemented by any relevant information observed during the recovery process and at each reference date, specified in accordance with paragraphs 171 to 174 and, in particular at least the following additional information:

• (a) all relevant factors that can be used to group defaulted exposures, and all relevant drivers of loss, including those that may become relevant after the date of default and at each reference date;
• (b) the amount outstanding at each reference date;
• (c) the values of any collateral associated with the defaulted credit obligations and their dates of valuation after the date of default.