Article 51 | Delegated Regulation 2022/439

Article 51 - LGD, ELBE and UL estimation for exposures in-default

Article 51

LGD, ELBE and UL estimation for exposures in-default

1. When assessing the requirements for LGD estimates for the exposures in default, and for the best estimate of expected losses (‘ELBE ’) as referred to in Article 181(1)(h) of Regulation (EU) No 575/2013, competent authorities shall verify that the institution uses one of the following approaches and shall assess the approach used by the institution:

(a)	direct estimation of the LGD for defaulted exposures (‘LGD in-default’) and direct estimation of ELBE;

(b)	direct estimation of ELBE and estimation of the LGD in-default as the sum of ELBE and an add-on capturing the unexpected loss related to exposures in default that might occur during the recovery period.

2. When assessing the approach of the institution in accordance with paragraph 1, competent authorities shall verify that:

(a)

the LGD in-default estimation methods, either as a direct estimation or as an add-on to ELBE, take into account possible additional unexpected losses during the recovery period, and in particular consider possible adverse changes in economic conditions during the expected length of the recovery process;

(b)	the LGD in-default, either as a direct estimation or as an add-on to ELBE, and the ELBE estimation methods take into account the information on the time in- default and recoveries realised so far;

(c)	where the institution uses a direct estimation of the LGD in-default, the estimation methods are consistent with the requirements of Articles 47, 48 and 49;

(d)	the LGD in-default estimate is higher than the ELBE, or, where the LGD in- default is equal to the ELBE, that for individual exposures such cases are limited and duly justified by the institution;

(e)	the ELBE estimation methods take into account all currently available and relevant information and in particular consider current economic circumstances;

(f)	where the specific credit risk adjustments exceed the ELBE estimates the differences between the two are analysed and duly justified;

(g)	the LGD in-default, either as a direct estimation or as an add-on to ELBE, and the ELBE estimation methods are clearly documented.

Recitals

CHAPTER 1 - GENERAL PROVISIONS ON THE ASSESSMENT METHODOLOGY (Article 1-5)

CHAPTER 2 - ASSESSMENT METHODOLOGY FOR SEQUENTIAL IMPLEMENTATION PLANS AND PERMANENT PARTIAL USE OF THE STANDARDISED APPROACH (Article 6-8)

CHAPTER 3 - ASSESSMENT METHODOLOGY FOR THE FUNCTION OF VALIDATION OF INTERNAL ESTIMATES AND OF THE INTERNAL GOVERNANCE AND OVERSIGHT OF AN INSTITUTION (Article 9-17)

CHAPTER 4 - ASSESSMENT METHODOLOGY FOR USE TEST AND EXPERIENCE TEST (Article 18-22)

CHAPTER 5 - ASSESSMENT METHODOLOGY FOR ASSIGNMENT OF EXPOSURES TO GRADES OR POOLS (Article 23-25)

CHAPTER 6 - ASSESSMENT METHODOLOGY FOR IDENTIFICATION OF DEFAULTS (Article 26-29)

CHAPTER 7 - ASSESSMENT METHODOLOGY FOR RATING SYSTEMS DESIGN, OPERATIONAL DETAILS AND DOCUMENTATION (Article 30-40)

CHAPTER 8 - ASSESSMENT METHODOLOGY FOR RISK QUANTIFICATION (Article 41-58)

SECTION 1 - General (Article 41)

SECTION 2 - Methodology for assessing overall requirements for quantification of risk parameters (Article 42-44)

SECTION 3 - Methodology for assessing requirements specific for PD estimation (Article 45-46)

SECTION 4 - Methodology for assessing requirements specific to own-LGD estimates (Article 47-52)Article 47 - Length of the historical observation period Article 48 - Method of LGD estimation GL Article 49 - Treatment of multiple defaults Q&A Article 50 - Use of LGD estimates appropriate for economic downturn Article 51 - LGD, ELBE and UL estimation for exposures in-default GL Article 52 - Requirements on collateral management, legal certainty and risk management

SECTION 5 - Methodology for assessing requirements specific to own- conversion factor estimates (Article 53-56)

SECTION 6 - Methodology for assessing the effect of guarantees and credit derivatives (Article 57)

SECTION 7 - Methodology for assessing the requirements for purchased receivables (Article 58)

CHAPTER 9 - ASSESSMENT METHODOLOGY FOR ASSIGNMENT OF EXPOSURES TO EXPOSURE CLASSES (Article 59-62)

CHAPTER 10 - ASSESSMENT METHODOLOGY FOR STRESS TEST USED IN ASSESSMENT OF CAPITAL ADEQUACY (Article 63-66)

CHAPTER 11 - ASSESSMENT METHODOLOGY FOR THE CALCULATION OF OWN FUNDS REQUIREMENTS (Article 67-71)

CHAPTER 12 - ASSESSMENT METHODOLOGY FOR DATA MAINTENANCE (Article 72-75)

CHAPTER 13 - ASSESSMENT METHODOLOGY OF INTERNAL MODELS FOR EQUITY EXPOSURES (Article 76-82)

CHAPTER 14 - ASSESSMENT METHODOLOGY FOR MANAGEMENT OF CHANGES TO RATING SYSTEMS (Article 83-84)

CHAPTER 15 - FINAL PROVISION (Article 85)

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Article 51 - LGD, ELBE and UL estimation for exposures in-default

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