These guidelines  (GL) specify how loss given default (LGD) appropriate for an economic downturn, which has been identified in accordance with the final draft Regulatory Technical Standards (RTS) on economic downturn, should be quantified. They supplement the Guidelines on PD estimation, LGD estimation and the treatment of defaulted assets (EBA/GL/2017/16) of 20/11/2017 (GL on PD and LGD estimation) and provide specific guidance on how to estimate LGD appropriate for an economic downturn.

These GL are hence an addendum to the GL on PD and LGD estimation, which are part of the European Banking Authority's (EBA's) roadmap to reduce unwarranted variability of risk parameters and own funds requirements. As such, this publication completes the plan outlined in the report on the review of the Internal Ratings-Based (IRB) approach published in February 2016. [It should be noted that the work on the RTS on economic downturn (which was a single item in that plan) has been split into the specification of the notion of an economic downturn and these GL providing guidance on how to incorporate such a downturn into LGD estimates.]

The policy for downturn LGD estimation builds on the notion of an economic downturn that is specified in the final draft regulatory technical standards on the specification of the nature, severity and duration of an economic downturn in accordance with Articles 181(3)(a) and 182(4)(a) of Regulation (EU) No 575/2013 (CRR), published on 16 November 2018.