Difference between revisions of "LGD In-Default"
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== Definition == | == Definition == | ||
| − | '''LGD In-Default''' | + | '''LGD In-Default''' denotes an estimated (modelled) [[Loss Given Default]] measure that applies to a defaulted yet not fully resolved credit exposure. |
| + | |||
| + | == Regulatory Requirements (EU) == | ||
| + | Under paragraph 193 of the EBA GL on PD and LGD, LGD in-default can be estimated directly or as the sum of [[Expected Loss Best Estimate | ELBE]] and an add-on capturing the [[Unexpected Loss]] related to the exposures in default that may occur during the recovery period. | ||
| + | |||
| + | In particular, the following should be taken into consideration: | ||
| + | |||
| + | * The use of a constant charge for unexpected losses for all defaulted exposures is not risk sensitive. In the ECB’s understanding, therefore, it does not allow an accurate assessment of risk. Where an institution does use a constant charge, it should justify this. It should demonstrate that the constant charge in question is an adequate estimate of all the components of unexpected loss envisaged in paragraph 193(b) of the EBA GL on PD and LGD during the remaining recovery period, i.e. between the date for which estimates are being applied and the final closure of the recovery process. This analysis should be performed at least for every calibration segment. | ||
| + | * LGD in-default estimates are generally expected to be higher than ELBE estimates and only equal for duly justified individual exposures, which are expected to be very limited. | ||
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[[Category:LGD Models]] | [[Category:LGD Models]] | ||
Revision as of 10:04, 14 May 2021
Definition
LGD In-Default denotes an estimated (modelled) Loss Given Default measure that applies to a defaulted yet not fully resolved credit exposure.
Regulatory Requirements (EU)
Under paragraph 193 of the EBA GL on PD and LGD, LGD in-default can be estimated directly or as the sum of ELBE and an add-on capturing the Unexpected Loss related to the exposures in default that may occur during the recovery period.
In particular, the following should be taken into consideration:
- The use of a constant charge for unexpected losses for all defaulted exposures is not risk sensitive. In the ECB’s understanding, therefore, it does not allow an accurate assessment of risk. Where an institution does use a constant charge, it should justify this. It should demonstrate that the constant charge in question is an adequate estimate of all the components of unexpected loss envisaged in paragraph 193(b) of the EBA GL on PD and LGD during the remaining recovery period, i.e. between the date for which estimates are being applied and the final closure of the recovery process. This analysis should be performed at least for every calibration segment.
- LGD in-default estimates are generally expected to be higher than ELBE estimates and only equal for duly justified individual exposures, which are expected to be very limited.
