Definition of economic loss and realised LGD

13.1 The PRA expects that, for the purpose of LGD estimation as referred to in Article 181(1)(a) of the Credit Risk: Internal Ratings Based Approach (CRR) Part, firms should calculate realised LGDs for each exposure as a ratio of the economic loss to the outstanding amount of the credit obligation at the moment of default, including any amount of principal, interest, or fee.

13.2 For the purpose of paragraph 13.1, firms should calculate the economic loss realised on an exposure (ie defaulted facility) as referred to in CRR Article 5(2) as the difference between:

(a) the outstanding amount of the credit obligation at the moment of default, without prejudice to paragraph 13.14, including any amount of principal, interest, or fee, increased by material direct and indirect costs associated with collecting on that exposure, discounted to the moment of default; and

(b) any recoveries realised after the moment of default, discounted to the moment of default.

13.3 For the purpose of calculation of the economic loss realised on an exposure in accordance with paragraph 13.2, firms should not take the following into account:

(a) recoveries related to collateral if they are not applying the LGD Modelling Collateral Method in accordance with Article 169A(1)(a) of the Credit Risk: Internal Ratings Based Approach (CRR) Part; and