13.A1 When applying the CRR requirements relating to the estimation of loss given default, the PRA expects firms to comply with the EBA’s Guidelines on PD estimation, LGD estimation and the treatment of defaulted assets (EBA/GL/2017/16) and the EBA’s Guidelines for the estimation of LGD appropriate for an economic downturn (‘Downturn LGD estimation’) (EBA/GL/2019/03). The PRA only expects firms to comply with paragraph 135 of the EBA’s Guidelines on PD estimation, LGD estimation and the treatment of defaulted assets to the extent that this would be consistent with paragraph 13.5A of this SS.

Negative LGDs

13.1 The PRA expects firms to ensure that no LGD estimate is less than zero.

Low LGDs

13.2 The PRA does not expect firms to be using zero LGD estimates in cases other than where they had cash collateral supporting the exposures.

13.3 The PRA expects firms to justify any low LGD estimates using analysis on volatility of sources of recovery, notably on collateral, and cures (as outlined below). This includes:

(a) recognising that the impact of collateral volatility on low LGDs is asymmetric as surpluses over amounts owed need to be returned to borrowers and that this effect may be more pronounced when estimating downturn rather than normal period LGDs; and