of Poland predicts bank-specific LLPs in a panel framework by a model, in which the ratio of LLP to total loans is explained by macro-economic variables (changes in the real WIBOR 3M rate, the GDP growth rate, the changes in real wage fund) and banks’ characteristics (the composition of loan portfolio). The Slovenian Central Bank first estimates the evolution of different categories of loans (with the GDP as the main explanatory variable); the LLPs are then assessed based on the estimations for loans.<sup>15</sup> The Austrian Central Bank, in the framework of Austrian banks’ operations in the CSEE & CIS countries, includes in the stress test procedure estimations of NPL and LLP ratios based on a pooled data for CSEE & CIS countries, where the NPLs and LLPs are linked to GDP growth. Expert judgment is involved in this analysis.

# **_4.1.2. Mapping of Macroeconomic Variables to PDs and LGDs_**

While the PDs are generally the output of model estimations, the practice for obtaining the LGDs so far (with the exception of the Czech Central Bank and Hungarian Central Bank) is a calibration based on expert judgment and Basel Committee’s prescriptions. The Slovak Central Bank uses the LGD ratio of 45 percent. The Bulgarian Central Bank calibrates its LGD estimates based on the bottom-up survey. Similarly, the Hungarian Central Bank uses LGDs for the corporate sector from the bottom-up survey of selected banks. For household mortgages, it estimates the LGDs using a panel regression containing as explanatory variables the loan-to-value ratio (LTV), the exchange rate, and house prices. Further, the LGD trajectories for the other sectors considered in the Hungarian Central Bank’s analysis are constructed under the assumption that their LGDs will increase in line with the LGDs for mortgages. CNB (2010) introduces LGD estimates for corporate loans, consumer credit loans and mortgage loans. Corporate LGD increases by 5 p.p. above the initial value of 45 percent for each percentage point of GDP decline vis-à-vis the baseline scenario. Similarly, consumer credit LGD increases by 5 p.p. above the initial value of 55 percent for each percentage point increase in unemployment. For mortgage loans, each percentage point of decline in property prices is directly reflected in a percentage point increase in the mortgage LGD above the initial value of 20 percent.

Owing to their importance in gauging credit risk, the estimations of PDs have attracted the largest modeling efforts so far. The PDs are typically modeled separately for various types of loan portfolios. The Austrian Central Bank focuses on ten different portfolios corresponding to ten industries. The Czech Central Bank estimates PDs for four different loan portfolios: non-financial corporations, loans to households for house purchase, consumer credit, and other loans. The Hungarian Central Bank also focuses on four loan portfolios: corporate, commercial real estate, household, and unsecured household loans. The Romanian and Slovak Central Banks model separately PDs for corporate loans and for household loans.

> 15 The Slovenian Central Bank also attempts to infer the evolution of  NPLs by using a model estimation for corporates' credit ratings.

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