4.2.1
| A robust data collection process should be put in place in order to support the estimation of LGD parameters. This process should follow the requirements pertaining to the Data Management Framework articulated in the MMS. If the data listed below is not currently available in the institution’s data bases, a formal project should be put in place in order to collect and store this data from the date of the MMG issuance.
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4.2.2
| Governance: The data types to be collected for the estimation of LGD are often spread across several teams and departments within institution. Consequently, close collaboration is expected between departments to (i) fully retrieve historical default cases, (ii) understand the reasons and the context for default and (iii) reconstruct long recovery processes that can last several years. In particular, close collaboration is expected between the risk analytics department in charge of model development and the department in charge of managing non-performing credit facilities.
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4.2.3
| Default definition: Institutions should ensure consistency between (i) the default definition used to collect data for LGD estimation and (ii) the default definition used to estimate PD for the same segment. PD and LGD are necessarily linked to each other and their estimation should be coherent. This is particularly relevant in the context of facility restructuring. If restructured facilities are included in the estimation of LGD, they should also be included in the estimation of PD.
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4.2.4
| Data types: The collection of data should cover all the elements necessary to estimate recoveries and historical LGDs, following each default event. At a minimum, the data collection process should include the following elements:
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| | (i)
| Default events: An exhaustive list of default events should be collected to support a robust estimation of LGD. They should be consistent with the default events employed for PD modelling. Institutions are expected to collect as many default events as possible covering at least one economic cycle. |
| | (ii)
| Exposure At Default: As per the definition section. For non-contingent facilities, the EAD should be the outstanding amount at the date of default. For contingent facilities, the EAD should be the outstanding amount at the date of default plus any other amounts that become due during the recovery process. This should include any additional drawings that occurred after default and before foreclosure or cure. It should also include any part of the original exposure that had been written-off before the default event was recorded. |
| | (iii)
| Outcome categorisation: Each default event should be linked to the categories presented in the next article, depending on the outcome of the recovery process, namely (i) cured & not restructured, (ii) cured & restructured, (iii) not cured & secured, and (iv) not cured & not secured. |
| | (iv)
| Obligor information: For each default event, client related information should be collected including, at a minimum, client segment, industry and geography. |
| | (v)
| Facility details: This should include the type of facility and the key elements of the facility terms such as the tenor, the seniority ranking and the effective interest rate. |
| | (vi)
| Restructuring: Each restructuring and rescheduling event should be identified and used in the categorisation of outcomes presented in the next articles. |
| | (vii)
| Collateral: For each default event related to collateralised facilities, institutions should collect all relevant collateral information, including, but not limited to, the type of collateral, the last valuation prior to the default event and the associated valuation date, the liquidation value after default and the associated liquidation date, the currencies of collateral values and unfunded credit protections. If several valuations are available, institutions have a method to estimate a single value. |
| | (viii)
| Historical asset prices: In order to estimate collateral haircut, historical time series should be collected, including amongst others, real estate prices, traded securities and commodity prices. |
| | (ix)
| Collected cash flows: For each default event, the data set should include the cash flow profile received through time, related to this specific default event. Provided that collected cash inflows are related to the specific default event, they can arise from any party, including the obligor itself, any guarantor or government entities. |
| | (x)
| Direct costs: These costs are directly linked to the collection of the recovery cash flows. They should include outsourced collection costs, legal fees and any other fees charged by third parties. If the facility is secured, the data set should include costs associated with the sale of collateral, including auction proceedings and any other fees charges by third party during the collateral recovery process. |
| | (xi)
| Indirect costs: Institutions are encourage to collect internal and external costs that cannot be directly attributed to the recovery process of a specific facility. Internal costs relate to the institution’s recovery process, i.e. mostly the team that manages non-performing credit facilities and obligors. External costs relate mostly to overall costs of outsourced collection services.
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4.2.5
| Categorisation: The outcome of default events should be clearly categorised. Institutions are free to define these categories, provided that these include, at a minimum, the below concepts.
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