LGD, ELBE and UL estimation for exposures in-default
Article 51
1. When assessing the requirements for LGD estimates for the exposures in default, and for the best estimate of expected losses (‘EL BE ’) as referred to in Article 181(1)(h) of Regulation (EU) No 575/2013, competent authorities shall verify that the institution uses one of the following approaches and shall assess the approach used by the institution: (a) direct estimation of the LGD for defaulted exposures (‘LGD in-default’) and direct estimation of ELBE; (b) direct estimation of ELBE and estimation of the LGD in-default as the sum of ELBE and an add-on capturing the unexpected loss related to exposures in default that might occur during the recovery period. 2. When assessing the approach of the institution in accordance with paragraph 1, competent authorities shall verify that: (a) the LGD in-default estimation methods, either as a direct estimation or as an add-on to ELBE, take into account possible additional unexpected losses during the recovery period, and in particular consider possible adverse changes in economic conditions during the expected length of the recovery process; (b) the LGD in-default, either as a direct estimation or as an add-on to ELBE, and the ELBE estimation methods take into account the information on the time in- default and recoveries realised so far; (c) where the institution uses a direct estimation of the LGD in-default, the estimation methods are consistent with the requirements of Articles 47, 48 and 49; (d) the LGD in-default estimate is higher than the ELBE, or, where the LGD in- default is equal to the ELBE, that for individual exposures such cases are limited and duly justified by the institution; (e) the ELBE estimation methods take into account all currently available and relevant information and in particular consider current economic circumstances; (f) where the specific credit risk adjustments exceed the ELBE estimates the differences between the two are analysed and duly justified; (g) the LGD in-default, either as a direct estimation or as an add-on to EL BE , and the EL BE estimation methods are clearly documented.