6.3.1.4 Direct and indirect costs

For the purpose of the calculation of the realised LGDs, institutions should take into account all material direct and indirect cost related to the recovery process. Where any material direct or indirect costs relating to the collection on exposures and the default of the respective counterparty have been incurred before the moment of default institutions should include these costs in the LGD estimation unless at least one of the following conditions is met:

• (a) these costs are clearly included in the outstanding amount of the credit obligation at the moment of default;
• (b) these costs are associated with the previous default of the same obligor, which is not considered a multiple default in accordance with paragraph 101.

Direct costs should include the costs of outsourced collection services, legal costs, the cost of hedges and insurances and all other costs directly attributable to the collection on a specific exposure. Institutions should consider all direct costs as material.

Indirect costs should include all costs stemming from the running of the institution’s recovery processes, overall costs of outsourced collection services not included as direct costs, and all other costs related to the collection on defaulted exposures that cannot be directly attributed to collection on a specific exposure. Institutions should include in their estimation of indirect costs an appropriate percentage of other ongoing costs, such as institutions’ overheads related to the recovery processes, unless they can demonstrate that these costs are immaterial.

6.3.2 Long-run average LGD