Final EBA Guidelines on the estimation of LGD under an economic downturn
The European Banking Authority (EBA) published on March 6th its final Guidelines specifying how institutions should quantify the estimation of loss given default (LGD) appropriate for conditions of an economic downturn. In particular, the Guidelines focus on requirements for the quantification of the calibration target used for downturn LGD estimation.
The Guidelines complete EBA's broader work on the review of the IRB approach aiming at reducing the unjustified variability in the outcomes of internal models, while preserving the risk sensitivity of capital requirements.
This article provides further insight on modelling approaches for calibrating downturn LGD.