General expectations - LGD estimation methodologies

12.1 Firms using the AIRB approach should assign an LGD estimate to each non-defaulted exposure and an estimate of LGD in-default and BEEL to each defaulted exposure within the range of application of the rating system. Firms should estimate LGDs for all facility grades of the distinct facility rating scale or for all pools that are incorporated in the rating system. For the purpose of LGD estimation, firms should treat each defaulted facility as a distinct default observation, unless more than one independent default was recognised on a single facility which does not meet the criteria of paragraph 12.2.

12.2 For the purpose of LGD estimation, with regard to defaults recognised on a single facility, where the time between the moment of the return of the exposure to non-defaulted status and the subsequent classification as default is shorter than nine months, firms should treat such an exposure as having been constantly defaulted from the first moment when the default occurred. Firms may specify a period longer than nine months for the purpose of considering two subsequent defaults as a single default in the LGD estimation if this is adequate for the specific type of exposures and reflects the economic meaning of the default experience.