Loss-given-default

1. The loss-given-default on a single name exposure shall be equal to the sum of the loss-given-default on each of the exposures to counterparties belonging to the single name exposure. The loss-given-default shall be net of the liabilities towards counterparties belonging to the single name exposure provided that those liabilities and exposures are set off in the case of default of the counterparties and provided that Articles 209 and 210 are complied with in relation to that right of set-off. No offsetting shall be allowed for if the liabilities are expected to be met before the credit exposure is cleared.

Where insurance and reinsurance undertakings have concluded contractual netting agreements covering several derivatives that represent credit exposure to the same counterparty, they may calculate the loss-given-default on those derivatives, as set out in paragraphs 3 to 3c, on the basis of the combined economic effect of all of those derivatives that are covered by the same contractual netting agreement, provided that Articles 209 and 210 are complied with in relation to the netting.

2. The loss-given-default on a reinsurance arrangement or insurance securitisation shall be equal to the following:

LGD= max [50%* (REcoverbales + 50% * RM re) - F * Collateral; 0]

where:

(a) Recoverables denotes the best estimate of amounts recoverable from the reinsurance arrangement or insurance securitisation and the corresponding debtors;

(b) RM re denotes the risk mitigating effect on underwriting risk of the reinsurance arrangement or securitisation;

(c) Collateral denotes the risk-adjusted value of collateral in relation to the reinsurance arrangement or securitisation;

(d) F denotes a factor to take into account the economic effect of the collateral arrangement in relation to the reinsurance arrangement or securitisation in case of any credit event related to the counterparty.

Where the reinsurance arrangement is with an insurance or reinsurance undertaking or a third country insurance or reinsurance undertaking and 60 % or more of that counterparty's assets are subject to collateral arrangements, the loss-given-default shall be equal to the following:

LGD= max[90%* (Recoverables + 50% * RM re) - F'* Collateral; 0]

F' denotes a factor to take into account the economic effect of the collateral arrangement in relation to the reinsurance arrangement or securitisation in the case of a credit event related to the counterparty.

3. The loss-given-default on a derivative falling within Article 192a(1) shall be equal to the following:

LGD= = max(18 % · (Derivative + 50 % · RM fin ) – 50 % · F′ · Value; 0)

where:

(a) Derative denotes the value of the derivative determined in accordance with Article 75 of Directive 2009/138/EC;

(b) RMfin denotes the risk-mitigating effect on market risk of the derivative;

(c) Value denotes the value of the assets held as collateral determined in accordance with Article 75 of Directive 2009/138/EC;

(d) F′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

3a. Notwithstanding paragraph 3, the loss-given-default on a derivative falling within Article 192a(2) shall be equal to the following:

LGD = max(16 % · (Derivative + 50 % · RM fin ) – 50 % · F′′ · Value; 0)

where:

(a) Derivative denotes the value of the derivative in accordance with Article 75 of Directive 2009/138/EC;

(b) RMfin denotes the risk-mitigating effect on market risk of the derivative;

(c) Value denotes the value of the assets held as collateral in accordance with Article 75 of Directive 2009/138/EC;

(d)  F′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

3b. The loss-given-default on derivatives other than those referred to in paragraphs 3 and 3a shall be equal to the following, provided that the derivative contract meets the requirements of Article 11 of Regulation (EU) 648/2012:

LGD=max(90 % · (Derivative + 50 % · RM fin ) – 50 % · F′′′ · Value; 0)

where:

(a) Derivative denotes the value of the derivative determined in accordance with Article 75 of Directive 2009/138/EC;

(b) RMfin denotes the risk-mitigating effect on market risk of the derivative;

(c) Value denotes the value of the assets held as collateral determined in accordance with Article 75 of Directive 2009/138/EC;

(d) F′′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

3c.  The loss-given-default on derivatives not covered by paragraphs 3, 3a and 3b shall be equal to the following:

LGD= max(90 % · (Derivative + RM fin ) – F′′′ · Collateral; 0)

where:

(a) Derivative denotes the value of the derivative determined in accordance with Article 75 of Directive 2009/138/EC;

(b) RMfin denotes risk-mitigating effect on market risk of the derivative;

(c) Collateral denotes the risk-adjusted value of collateral in relation to the derivative;

(d) F′′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

3d. Where the loss-given-default on derivatives is to be calculated on the basis referred to in the second subparagraph of paragraph 1, the following rules shall apply for the purposes of paragraphs 3 to 3c:

(a) the value of the derivative shall be the sum of the values of the derivatives covered by the contractual netting arrangement;

(b) the risk-mitigating effect shall be determined at the level of the combination of derivatives covered by the contractual netting arrangement;

(c) the risk-adjusted value of collateral shall be determined at the level of the combination of derivatives covered by the contractual netting arrangement.

4. The loss-given-default on a mortgage loan shall be equal to the following:

LGD= max(Loan – (80 % × Mortgage + Guarantee); 0)

where:

a) Loan denotes the value of the mortgage loan determined in accordance with Article 75 of Directive 2009/138/EC;

b) Mortgage denotes the risk-adjusted value of the mortgage;

c) Guarantee denotes the amount that the guarantor would be required to pay to the insurance or reinsurance undertaking if the obligor of the mortgage loan were to default at a time when the value of the property held as mortgage were equal to 80 % of the risk-adjusted value of the mortgage.

For the purposes of point (c), a guarantee shall be recognised only if it is provided by a counterparty mentioned in points (a) to (d) of the first subparagraph of Article 180(2) and it complies with the requirements set out in Articles 209, 210 and points (a) to (e) of Article 215.

5. The loss-given-default on a legally binding commitment as referred to in Article 189(2)(e) of this Regulation shall be equal to the difference between its nominal value and its value in accordance with Article 75 of Directive 2009/138/EC.

6. The loss-given-default on cash at bank as defined in Article 6 item F of Council Directive 91/674/EEC, of a deposit with a ceding undertaking, of an item listed in Article 189(2)(d) or Article 189(3)(e) of this Regulation, or of a receivable from an intermediary or policyholder debtor, as well as any other exposure not listed elsewhere in this Article shall be equal to its value in accordance with Article 75 of Directive 2009/138/EC.