CP13/6 - CRD IV for Investment Firms - Financial Conduct Authority

FCA 2013/xx
(3) further adjust the statistical PD to the extent necessary to take account
of the following:
(a)
any likely differences between the observed default rates over
the period covered by the firm's default experience and the
long-run PD for each grade required by article 180(1)(a) and
(2)(a) of the EU CRR; and
(b)
any other information that indicates (taking into account the
robustness and cogency of that information) that the statistical
PD is likely to be an inaccurate estimate of PD.
4.3.75 G The FCA expects a firm to take into account only defaults that occurred
during periods that are relevant to the validation under the EU CRR of the
model or other rating system in question when determining whether there are
20 defaults or fewer.
Supervisory slotting criteria for specialised lending
4.3.76 G Until the regulatory technical standards specified in article 153(9) of the EU
CRR come into force, we would expect a firm to assign exposures to the risk
weight category for specialised lending exposures based on the criteria set out
in the tables in IFPRU 4 Annex 1G (Slotting criteria).
Negative LGDs
4.3.77 G The FCA expects a firm to ensure that no LGD estimate is less than zero.
Low LGDs
4.3.78 G The FCA does not expect a firm to be using zero LGD estimates in cases
other than where it had cash collateral supporting the exposures.
4.3.79 G The FCA expects a firm to justify any low LGD estimates using analysis on
volatility of sources of recovery, notably on collateral, and cures. This
includes:
(1) recognising that the impact of collateral volatility on low LGDs is
asymmetric as surpluses over amounts owed need to be returned to
borrowers and that this effect may be more pronounced when
estimating downturn, rather than normal period LGDs; and
(2) recognising the costs and discount rate associated with realisations
and the requirements of article 181(1)(e) of the EU CRR.
4.3.80 G To ensure that the impact of collateral volatility is taken into account, the
FCA expects a firm’s LGD framework to include non-zero LGD floors which
are not solely related to administration costs (see article 179(1)(f) of the EU
CRR).
Treatment of cures
4.3.81 G Where a firm wishes to include cures in its LGD estimates, the FCA expects it
to do this on a cautious basis, with reference to both its current experience
and how this is expected to change in downturn conditions. In particular, this
involves being able to articulate clearly both the precise course of events that
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