1.Institutions shall use LGD* calculated in accordance with this paragraph and paragraph 2 as the LGD for the purposes of Chapter 3.
Where the ratio of the value of the collateral (C) to the exposure value (E) is below the required minimum collateralisation level of the exposure (C*) as laid down in Table 5, LGD* shall be the LGD laid down in Chapter 3 for uncollateralised exposures to the counterparty. For this purpose, institutions shall calculate the exposure value of the items listed in Article 166(8) to (10) by using a conversion factor or percentage of 100 % rather than the conversion factors or percentages indicated in those paragraphs.
Where the ratio of the value of the collateral to the exposure value exceeds a second, higher threshold level of C** as laid down in Table 5, LGD* shall be that prescribed in Table 5.
Where the required level of collateralisation C** is not achieved in respect of the exposure as a whole, institutions shall consider the exposure to be two exposures — one corresponding to the part in respect of which the required level of collateralisation C** is achieved and one corresponding to the remainder.
| LGD* for senior exposure | LGD* for subordinated exposures | Required minimum collateralisation level of the exposure (C*) | Required minimum collateralisation level of the exposure (C**)
1.Under the IRB Approach, except for those exposures that fall under the scope of Article 220, institutions shall use the effective LGD (LGD*) as the LGD for the purposes of Chapter 3 to recognise funded credit protection eligible pursuant to this Chapter. Institutions shall calculate LGD* as follows:
\mathrm{LGD}^* = \mathrm{LGD}_U \cdot \frac{E_U}{E \cdot (1 + H_E)} + \mathrm{LGD}_S \cdot \frac{E_S}{E \cdot (1 + H_E)}
where:
E | = the exposure value before taking into account the effect of the funded credit protection; for an exposure secured by financial collateral eligible in accordance with this Chapter, that amount shall be calculated in accordance with Article 223(3); in the case of securities lent or posted, that amount shall be equal to the cash lent or securities lent or posted; for securities that are lent or posted, the exposure value shall be increased by applying the volatility adjustment (HE) in accordance with Articles 223 to 227;
ES | = the current value of the funded credit protection received after the application of the volatility adjustment applicable to that type of funded credit protection (HC) and the application of the volatility adjustment for currency mismatches (Hfx) between the exposure and the funded credit protection, in accordance with paragraphs 2 and 3; ES shall be capped at the following value: E·(1+HE);
EU | = E·(1+HE) – ES;
2. TheLGD_{U} | = the applicable LGD* and required collateralisation levelsLGD for thean securedunsecured partsexposure of exposures areas set out in TableArticle 5 of this paragraph.161(1);
LGDS | = the applicable LGD to exposures secured by the type of eligible FCP used in the transaction, as specified in paragraph 2, Table 1.
2.Table 1 specifies the values of LGDS and Hc applicable in the formula set out in paragraph 1.
Type of FCP | LGDS | Volatility adjustment (Hc)
Financial collateral | 0 % | Volatility adjustment Hc as set out in Articles 224 to 227
Receivables | 3520 % | 6540 % | 0 % | 125 %
Residential property/commercialproperty and commercial immovable property | 3520 % | 6540 % | 30 % | 140 %
Other physical collateral | 25 % | 40 % | 70 % | 30 % | 140 %
Ineligible FCP | Not applicable | 100 %
3.Where an eligible funded credit protection is denominated in a different currency than that of the exposure, the volatility adjustment for currency mismatch (Hfx) shall be the same as the one that applies pursuant to Articles 224 to 227.
4.3. As an alternative to the treatment set out in paragraphs 1 and 2,2 of this Article, and subject to Article 124(2),124(9), institutions may assign a 50 % risk weight to the part of the exposure that is, within the limits set out in Article 125(2)(d)125(1), first subparagraph, and Article 126(2)(d)126(1), first subparagraph, respectively, fully collateralised by residential property or commercial immovable property situated within the territory of a Member State where all of the conditions set out in Article 199(3) or (4) are met.
5.To calculate risk-weighted exposure amounts and expected loss amounts for IRB exposures that fall within the scope of Article 220, institutions shall use E* in accordance with Article 220(4) and shall use LGD for unsecured exposures, as set out in Article 161(1), points (a), (aa) and (b).