CP10 (Full Document) - European Banking Authority

that they monitor and record positive outcomes of recovery
processes to make sure that no systematic errors have been
made.
· The treatment of zero­loss facilities should be examined to
ensure that it does not result in any distortions. For example, a
significant number of zero­loss facilities may indicate, that the
institution uses an inappropriately early definition of default or
that the RDS contains some facilities which are not true defaults
(for example, technical defaults such as small outstanding
charges on repaid loans).
Risk drivers
226. While there might be significant differences in LGD estimation
methods across institutions and across portfolios, a common set of
risk drivers that institutions should take into account in the
estimation process can be identified (see Annex VII, Part 4,
Paragraph 49). These drivers can be grouped in five categories:
1. Transaction­related, including facility type, collateral, guarantees
from third parties, seniority, time in default, seasoning, Loan to
Value (LTV), and recovery procedures;
2. Borrower­related, including borrower size (as it relates to
transaction characteristics), exposure size, firm­specific capital
structure (as it relates to the firm’s ability to satisfy the claims of
its creditors in the event that it defaults), geographic region,
industrial sector, and line of business;
3. Institution­related, including internal organisation and internal
governance, relevant events such as mergers, and specific
entities within the group dedicated to recoveries such as ‘bad
credit institutions’;
4. External, including interest rates and legal framework (and, as a
consequence, the length of the recovery process); and
5. Other risk factors.
227. This list is neither prescriptive nor comprehensive, and cannot reflect
the specific features of the business of individual institutions or the
environment in which they operate. Each institution is responsible for
identifying and investigating additional risk drivers that are relevant
to its specific circumstances. Institutions should collect data on what
they consider to be the main drivers of loss for a given group of
facilities, and should include the most material drivers in their LGD
estimation process. The institution’s judgements as to which risk
drivers are most material should be appropriately documented and
should be discussed with supervisors.
Estimation methodologies
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