Discounting rate

The EBA has considered various possibilities with regard to the discounting rate, and analysed various practices in that regard. Approaches used by institutions include the use of discounting factors based on effective interest rates of the underlying loans, various add-ons in the range of 0 to 10% and even higher in some cases, and various underlying internal and external interest rate benchmarks. As significantly different approaches are currently used by institutions, the discounting factor was recognised as one of the main drivers of non-risk-based variability of the LGD estimates. The proposed solution of using interbank funding rates and a 5% add-on has the advantage of being simple and contributing to increased comparability of LGD estimates. It is considered appropriate that the discounting rate should not depend on the credit standing of the institution, so the discounting rate does not reflect funding costs but rather is focused on the uncertainty inherent in the recovery processes and the time value of money. For exposures in currencies other than the euro, and for observations from before the adoption of euro, an equivalent interest rate should be used that is applicable for the currency of the exposure. This comparable rate should be sufficiently liquid to reflect the level of risk at the date of default in a correct manner.

The discounting rate specified in the GL is expected to reflect the average economic conditions that are adequate for the purpose of the long-run average LGD. It is not considered to be associated with downturn conditions. The downturn adjustment should be specified in accordance with the requirements of the RTS on the nature, severity and duration of economic downturn, which will be specified on the basis of Article 181(3)(a) of the CRR.

While the level of the add-on is consistent with the results of the IRB survey carried out across the institutions and reflects a balanced figure between the discounting rates applied within and outside the euro area, the adequacy of the 5% add-on will be further analysed and, if necessary, reviewed before the date of application of these GL. Furthermore, the EBA will also aim to publish a list of equivalent interbank rates for currencies other than euro, which should be used for the purpose of realised LGD calculation for exposures denominated in those currencies.

1. Forbhreathnú

1.1 Tagairtí

1.2 Ceanglais aitheanta

1.3 Caighdeáin ghaolmhara

2. Ceanglais aitheanta

3. Caighdeáin ghaolmhara

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