129. The approach developed by institutions to include the effect of collaterals in the LGD …

The approach developed by institutions to include the effect of collaterals in the LGD estimation should meet all of the following conditions:

• (a) institutions should avoid the bias that may stem from including the cash flows related to realisation of collateral in the estimation of recoveries that are realised without the use of collaterals and vice versa;
• (b) where institutions estimate separate recovery rates for specific types of collaterals, they should avoid a bias that may stem from including in the estimation sample the observations where the exposure was secured by only a part of the value of the collateral. For this purpose institutions should take reasonable steps to obtain the data on the total value of the collateral and total sale price of the collateral and include this information in the estimation where it is available;
• (c) where institutions estimate separate recovery rates for specific types of collaterals they should recognise and include in this estimation direct costs related to the collection on each of these specific types of collaterals separately as well;
• (d) where institutions estimate separate recovery rates for specific types of collaterals they should include in this estimation all recoveries realised from a specific type of collateral including those realised on exposures where the realisation of the collateral has been completed but the overall recovery process has not yet been closed;
• (e) where the same collateral covers several exposures, institutions should specify an adequate allocation methodology in order to avoid double counting of collaterals; the allocation methodology should be consistent between the LGD estimation and the application of LGD estimates and with the methodology used for accounting purposes;
• (f) the estimates should not be based solely on the estimated market value of the collateral but they should also take into account the realised recoveries from past liquidations and the potential inability of an institution to gain control and liquidate the collateral. For this purpose, institutions should take into account in the estimation those historical observations where the collateral could not be realised or where the recovery process was longer than expected, due to inability or difficulty to gain control or liquidate the collateral. Where institutions estimate the recovery rates related to specific types of collaterals, they should take into account the time between the moment of default and the time when the cash flows related to the collection on these types of collaterals have been received and should include in the estimation those observations where the collateral has not been realised as a result of inability to gain control;
• (g) the estimates should take into account the potential decreases in collateral value from the point of LGD estimation to the eventual recovery, in particular those resulting from changes in the market conditions, the state and age of the collateral and, where relevant, currency fluctuations. Where institutions have experienced decreases in values of collaterals and these are already reflected in observed recoveries, no further adjustments to the LGD estimates based on these observations should be made. Where potential decreases in values of collaterals are not reflected in historical observations or where institutions predict further, potentially more severe decreases in the future, they should be included in the quantification of LGD estimates by means of an appropriate adjustment based on forward-looking expectations. However, the LGD estimates should not be adjusted to take into account any potential increases in collateral value;
• (h) the estimates should take into account in a conservative manner the degree of dependence between the risk of the obligor and the risk of the diminishing value of the collateral as well as the cost of liquidating the collateral.

6.2.4 Homogeneity of facility grades or pools

1. Forbhreathnú

1.1 Tagairtí

1.2 Ceanglais aitheanta

1.3 Caighdeáin ghaolmhara

2. Ceanglais aitheanta

3. Caighdeáin ghaolmhara

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