Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p40
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 108828–111757

although it must be able to reconcile accounting and economic loss.
 2.          An ADI may make adjustments to its LGD estimates to reflect its own workout and collection expertise. Such adjustments must be supported by sufficient internal empirical evidence.
 3.          LGD estimates must take into account additional drawings after the time of default.
 4.          LGD estimates must reflect economic downturn conditions. That is, an ADI must take into account the potential for LGD to be higher than average during a period when defaults or credit losses are substantially higher than average.
 5.          Where loss severities do not exhibit cyclical variability, LGD estimates must not be less than the long-run default-weighted average LGD calculated as the average loss of all observed defaults within a data source for that type of exposure.
 6.          LGD estimates must be grounded in historical recovery rates and, where applicable, must not be based solely on the estimated market value of collateral.
 7.          To the extent that LGD estimates take into account the existence of collateral, an ADI must establish internal requirements for collateral management, operational procedures, legal certainty and risk management processes that are consistent with those detailed in Attachment G to APS 112 and Attachment E to this Prudential Standard.
 8.          For LGD estimation purposes, an ADI must consider the extent of any dependence between the risk of the borrower and that of the collateral or collateral provider. Cases where there is a significant degree of dependence must be addressed in a conservative manner. Currency mismatches between the underlying obligation and the collateral must also be considered and treated conservatively in the ADI's assessment of LGD.

Additional requirements for corporate exposures
 1.          Estimates of LGD for corporate exposures must be based on a minimum data observation period that should ideally cover at least one complete economic cycle but, in any case, must be no shorter than a period of seven years from at least one source. If the available observation period spans a longer period from any source and the data are relevant and material, this longer period must be used.

Additional requirements for retail exposures
 1.          The minimum data observation period for LGD estimates for retail exposures is five years from at least one data source. If the available observation period spans a longer period from any source and the data are relevant and material, this longer period must be used. The less data an ADI has, the more conservative it must be in its estimation of LGD.

Additional requirements for defaulted exposures
 1.          The LGD assigned to a defaulted exposure must reflect the possibility that an ADI may have to recognise additional UL during the recovery period.

Risk quantification requirements specific to exposure