7.3 Calibration of EL BE and LGD in-default

For the purposes of EL BE and LGD in-default estimation, institutions should calculate the realised LGDs for defaulted exposures, in accordance with section 6.3.1 with the only difference that this should be done with regard to each of the reference dates specified in accordance with paragraphs 171 to 174, rather than the date of default. In the calculation of the realised LGD at a given reference date institutions should include all fees and interest capitalised before the reference date and they should discount all subsequent cash flows and drawings to the reference date.

Where, after the moment of default, institutions write-off part of the exposure the calculation of the economic loss and the realised LGD should be based on the full amount of the outstanding credit obligation, without taking into account the partial write-off. However, where institutions regularly write-off parts of exposures based on a consistent policy in terms of the time and proportion of the write-off, they may include this information in the calibration of final EL BE and LGD in-default. Where institutions perform write-offs in a less regular manner, they may reflect the information about the partial write-off of a specific exposure in the application of these parameters to this exposure by overriding the output of the rating assignment process in accordance with section 8.2 in order to ensure consistency between the LGD estimation and the application of the LGD estimates.

For the purposes of EL BE and LGD in-default estimation, institutions should calculate the long run average LGD of the realised LGDs for defaulted exposures, referred to in paragraph 178, following the requirements set out in section 6.3.2 with the only exception that, for each reference date, incomplete recovery processes should be used only if their relevant reference date for the application of the EL BE and LGD in-default parameters is posterior to the reference date under consideration for the estimation.

In accordance with section 6.3.2.3 institutions should not estimate any future recoveries for exposures that remain in defaulted status for a period of time longer than the maximum length of the recovery process as specified by the institution. However, relevant information regarding specific exposures, in particular information about existing collateral, may be reflected in the application of these parameters by overriding the output of the rating assignment process in accordance with section 8.2.

7.3.2 Specific requirements for EL BE estimation

7.3.2.1 Consideration of MoC in EL BE estimation

7.3.2.2 Current economic circumstances

7.3.2.3 Relation of EL BE to specific credit risk adjustments