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Final Report - Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures (EBA/GL/2017/16)1. Executive summary2. Background and rationale3. Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures1 Compliance and reporting obligations2 Subject matter, scope and definitions2.1 Subject matter2.2 Scope of application2.3 Addressees2.4 Definitions3 Implementation3.1 Date of application3.2 First application of the Guidelines4 General estimation requirements4.1 Principles for specifying the range of application of the rating systems4.2 Data requirements4.3 Human judgement in estimation of risk parameters4.4 Treatment of deficiencies and margin of conservatism5 PD estimation5.1 General requirements specific to PD estimation5.2 Model development in PD estimation5.3 PD calibration6 LGD estimation6.1 General requirements specific to LGD estimation6.2 Model development in LGD estimation6.3 LGD calibration7 Estimation of risk parameters for defaulted exposures7.1 General requirements specific to ELBE and LGD in-default estimation7.2 Model development in the estimation of ELBE and LGD in-default7.3 Calibration of ELBE and LGD in-default8 Application of risk parameters8.1 Conservatism in the application of risk parameters8.2 Human judgement in the application of risk parameters8.3 Use of internal ratings and default and loss estimates8.4 Calculation of IRB shortfall or excess9 Review of estimatesAccompanying documents
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Version date: 20 November 2017 - onwards

7.1 General requirements specific to ELBE and LGD in-default estimation

7.1.1 Estimation methodologies for ELBE and LGD in-default

165. 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 ELBE estimate and an LGD in-default estimate to each defaulted exposure within the range of application of the rating system subject to such permission.

166. Institutions should estimate ELBE and LGD in-default for each of the facility grades of the distinct facility rating scale or for each of the pools that are used within the rating system.

167. For the purposes of ELBE and LGD in-default estimation, and unless otherwise specified in this Chapter, institutions should use the same estimation methods used for estimating LGD on non-defaulted exposures, as set out in Chapter 6.

168. Institutions should take into consideration all relevant post-default information in their ELBE and LGD in-default estimates in a timely manner, in particular where events from the recovery process invalidate the recovery expectations underlying the most recent estimates.

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