1.An institution shall calculate the value of LGD* that it shall use as the LGD for the purposes of Chapter 3 in accordance with paragraphs 2 and 3 where both the following conditions are met:
(a)the institution uses the IRB Approach to calculate risk-weighted exposure amounts and expected loss amounts;
(b)an exposure is collateralised by both financial collateral and other eligible collateral.
2.Institutions shall be required to subdivide the volatility-adjusted value of the exposure, obtained by applying the volatility adjustment as set out in Article 223(5) to the value of the exposure, into parts so as to obtain a part covered by eligible financial collateral, a part covered by receivables, a part covered by commercial immovable property collateral or residential property collateral, a part covered by other eligible collateral, and the unsecured part, as applicable.
3.Institutions shall calculate LGD* for each part of the exposure obtained in paragraph 2 separately in accordance with the relevant provisions of this Chapter.
Institutions that have obtained multiple types of funded credit protection may, for exposures treated under the IRB Approach, apply the formula set out in Article 230, sequentially for each individual type of collateral. For that purpose, those institutions shall, after each step of recognising one individual type of FCP, reduce the remaining value of the unsecured exposure (EU) by the adjusted value of the collateral (ES) recognised in that step. In accordance with Article 230(1), the total of ES across all funded credit protection types shall be capped at the value of E·(1+HE), resulting in the following formula:
\mathrm{LGD}^* = \mathrm{LGD}_U \cdot \frac{E_U}{E \cdot (1 + H_E)} + \sum_i \mathrm{LGD}_{S,i} \cdot \frac{E_{S,i}}{E \cdot (1 + H_E)}
where:
LGDS,i | = the LGD applicable to FCP i, as specified in Article 230(2);
ES,i | = the current value of FCP i received after the application of the volatility adjustment applicable for the type of FCP (Hc) pursuant to Article 230(2).