EBA · 2015_1933 Final Q&A

QRRE loss rate

Regulation
Regulation (EU) No 575/2013 (CRR)
Article
154, para. 4
Topic
Credit risk
Submitted by
Credit institution
Submitted
2015-04-07
Answered
2015-09-25
Answer provided by
ESAs (EBA, ESMA, EIOPA)
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Question

What is meant by loss rate in this context?

Background

LGD is a fixed and downturn value in the capital requirement calculation. Based on the logic of the capital model the analysis of the PD volatility seems more reasonable, but it is not loss rate. Realised default rate x LGD is also a possible interpretation.

Answer

The loss rate for a set of exposures is the ratio of total losses for this set of exposures divided by total exposure values of this set of exposures, i.e. unlike for Loss Given Default (LGD), not limited to defaulted exposures only. In the absence of sufficient realised losses, consideration should be given to alternative data where appropriate conservatism can be demonstrated. In the context of Article 154(4)(d) of Regulation (EU) No 575/2013 (CRR), a portfolio of exposures (set of exposures) for which loss rates are to be determined needs to be distinguished into several subsets of exposures by Probability of Default (PD) bands because having exhibited low volatility of loss rates, relative to their average level of loss rates,  is required especially within the low PD bands.

Original source: European Banking Authority, Q&A ID 2015_1933

This Q&A is published by European Banking Authority and is non-binding. It does not constitute legal advice. Updated weekly from official ESA sources.

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