4 Loss given default in IRB approaches
LGD - sovereigns floor
4.1 In view of the absence of sufficient data on which to base reliable LGD estimates, firms should apply a 45% LGD floor to each unsecured sovereign exposure.
LGD - retail mortgages floor
4.2 In line with the requirement under BIPRU TP11.6R, and in view of the requirement of Article 164(4) of the Capital Requirements Regulation that will apply from 1 January 2014, firms should apply a 10% floor to the exposure weighted average LGD for retail exposures that are secured by residential properties and do not benefit from guarantees from central governments.
LGD - retail mortgages property sales reference point
4.3 The PRA consider an average reduction in property sales prices of 40% from their peak price, prior to the market downturn, to be an appropriate reference point when assessing downturn LGD for mortgage portfolios. This reduction captures both a fall in the value of the property owing to house price deflation and a distressed forced sale discount.
4.4 Where firms adjust assumed house price values within their LGD models to take account of current market conditions (eg with reference to appropriate house price indices) we recognise that realised falls in market values may be captured automatically. Firms adopting such approaches may remove observed house price falls from their downturn house price adjustment so as not to double count. All firms wishing to apply such an approach must seek the consent of the PRA and be able to demonstrate that the following criteria are met: