Method of conversion factors estimation
Article 54
When assessing the method of estimating conversion factors as referred to in Article 182 of the Regulation (EU) No 575/2013, competent authorities shall verify that: (a) the institution assesses estimates of conversion factors by facility grade or pool; (b) the average realised conversion factors by facility grade or pool are calculated using the number of default weighted average; (c) all observed defaults within the data sources are used for conversion factors estimation; (d) the possibility of additional drawings is taken into account in a conservative manner, except for retail exposures when they are included in the LGD estimates; (e) the institution’s policies and strategies regarding account monitoring, including limit monitoring, and payment processing are reflected in the conversion factors estimation; (f) all of the following are adequate to the type of exposures to which they are applied: (i) the functional and structural form of the estimation method; (ii) assumptions on which the estimation method is based; (iii) where applicable the method of estimation of the downturn effect; (iv) the length of the historical observation period in accordance with Article 53; (v) the margin of conservatism applied in accordance with Article 44; (vi) the human judgement; (vii) where applicable, the choice of risk drivers.