2.1 This chapter sets out the PRA's proposed requirements for specifying the nature, severity, and duration of an economic downturn, for the purposes of calibrating both downturn loss given default (LGD) and exposure at default (EAD).

2.2 The PRA's rationale for proposing requirements that specify the nature of an economic downturn is to ensure that consistent and relevant economic indicators are considered. The PRA's rationale for proposing to introduce requirements that specify the severity and duration of an economic downturn is to ensure that downturn estimates of LGD and EAD reflect consistent and sufficiently severe downturn scenarios, and that the selected downturn period is of sufficient duration to adequately capture the economic impact of a particular downturn event.

2.3 The PRA proposes to make technical standards setting out requirements relating to identifying economic downturns, as set out in Appendix 1, and to update the relevant section of its expectations in SS11/13, as set out in Appendix 2.

The nature of economic downturns

2.4 Within the proposed technical standards, the PRA is proposing a consistent set of economic indicators that would be considered relevant for all exposures, as the PRA considers them to be key indicators of an economic cycle:

(a) gross domestic product (GDP);

(b) unemployment rate;

(c) externally provided aggregate default rates, where available; and