6.1 General requirements specific to LGD estimation

6.1.1 LGD estimation methodologies

100. Institutions that have obtained permission to use own estimates of LGD in accordance with Article 143(2) of Regulation (EU) No 575/2013 should assign an LGD estimate to each non-defaulted exposure and an estimate of LGD in-default and ELBE to each defaulted exposure within the range of application of the rating system subject to such permission in accordance with Articles 172 and 173 of Regulation (EU) No 575/2013. Institutions should estimate LGDs for all facility grades of the distinct facility rating scale or for all pools that are incorporated in the rating system. For the purpose of LGD estimation institutions should treat each defaulted facility as a distinct default observation, unless more than one independent defaults were recognised on a single facility which do not meet the conditions of paragraph 101.

101. For the purpose of LGD estimation, with regard to defaults recognised on a single facility, where the time between the moment of the return of the exposure to non-defaulted status and the subsequent classification as default is shorter than nine months, institutions should treat such exposure as having been constantly defaulted from the first moment when the default occurred. Institutions may specify a period longer than nine months for the purpose of considering two subsequent defaults as a single default in the LGD estimation, if this is adequate to the specific type of exposures and reflects the economic meaning of the default experience.