CP10 (Full Document) - European Banking Authority

LGD estimation, they have to be taken into account in the estimation
of CF whatever the method chosen.
Time horizon
249. The above definition of Conversion Factor requires institutions to
estimate how much of the currently undrawn amount will be drawn
by the time of default. Thus calculating the Conversion Factor
involves observing and comparing (at least) two points in time: the
present time and the time of default. Estimated Conversion Factors
are derived from realised Conversion Factors for defaulted exposures
in the RDS. The time of default and the drawn amount at default of
the exposures in the RDS can be observed directly.
250. At this point a very brief outline of four different approaches to
measuring realised CFs is provided. The list is not meant to be
exhaustive and does not preclude any other approach. Institutions
are encouraged to develop approaches that best fit their specific
business. In particular, the following descriptions do not relieve
institutions of their responsibility to conduct their own analysis of
which of the approaches described below (if any) best fits their
business, or whether other approaches might be more appropriate.
Similarly, they do not restrict the views of supervisory bodies
concerning other methods, nor are they intended to hinder the
development of more advanced methods of CF estimation.
251. Institutions should ensure that the points in time chosen for the
calculation of realised CF in the RDS are appropriate for a one­year
horizon for estimating CFs. This might require considering sets of
different time intervals preceding the time of default.
• Cohort approach. The observation period is subdivided into time
windows. For the purpose of realised CF calculations, the drawn
amount at default is related to the drawn/undrawn amount at the
beginning of the time window.
252. When using this approach, the institution shall use a cohort period of
one year unless it can prove that a different period would be more
conservative and more appropriate.
· Fixed­horizon approach. The drawn amount at default is related
to the drawn/undrawn amount at a fixed time prior to default.
This approach implies the simplifying assumption that all
exposures that will default during the chosen horizon will default
at the same point in time: the end of the fixed horizon.
253. When using this approach, the institution shall use a fixed horizon of
one year unless it can prove that another period would be more
conservative and more appropriate.
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