6.3.1.2 Treatment of fees, interest and additional drawings after default

For the purpose of Article 181(1)(i) of Regulation (EU) No 575/2013, institutions should take into account in the calculation of realised LGD any fees for delays in payments that have been capitalised in the institution’s income statement before the moment of default by including them in the outstanding amount of the credit obligation at the moment of default in the numerator and denominator of the realised LGD. Where the fees were extended to the obligor in order to recover direct costs already incurred by the institution and these costs are already included in the calculation of the economic loss, institutions should not add these amounts to the economic loss or outstanding amount again. Any fees capitalised after the moment of default should not increase the amount of economic loss or amount outstanding at the moment of default. However, all recoveries, including those related to fees capitalised after default, should be included in the calculation of economic loss.

Institutions should apply the treatment specified in paragraph 137 to any interest capitalised in the institution's income statement before and after the moment of default.

In accordance with Article 182(1)(c) of Regulation (EU) No 575/2013 institutions that obtained permission to use own estimates of LGD and conversion are required to reflect the possibility of additional drawings by the obligor up to and after the time of default in their estimates of conversion factors. In the case of retail exposures, in accordance with Articles 181(2)(b) and 182(3) of this Regulation institutions may reflect future drawings either in their conversion factors or in their LGD estimates. These future drawings should be understood as additional drawings by the obligor after the moment of default.

Where institutions include additional drawings by the obligor after the moment of default in their conversion factors they should calculate realised LGD as a ratio of the economic loss to the outstanding amount of the credit obligation at the moment of default increased by the amount of additional drawings by the obligor after the moment of default discounted to the moment of default.

For retail exposures, where institutions do not include additional drawings by the obligor after the moment of default in their conversion factors they should calculate realised LGD as a ratio of the economic loss to the outstanding amount of the credit obligation at the moment of default and they should not increase the denominator of the ratio by the value of additional drawings by the obligor after the moment of default.

Irrespective of whether institutions reflect future drawings in their conversion factors or in their LGD estimates they should calculate the economic loss used in the numerator of the realised LGD including the additional drawings after the moment of default and all realised recoveries discounted to the moment of default.