Sets detailed requirements for institution-estimated loss-given-default (LGD) under the IRB Approach: estimate LGDs by facility grade or pool using default-weighted realised LGDs; apply LGDs appropriate for an economic downturn where more conservative and make adjustments to limit capital impact; consider dependence between obligor risk and funded credit protection and treat significant dependence conservatively; treat currency mismatches conservatively; do not base LGD solely on market value of funded protection; establish internal management and legal-certainty requirements consistent with Chapter 4; exclude amounts expected from funded protection already recognised for counterparty exposure under Chapter 6 from LGD; for exposures in default use current expected loss plus an estimate of additional loss during recovery; capitalised late fees must be added to exposure and loss; corporate, institutional and public-sector LGD estimates must use at least five years of data, increasing to seven.

For retail exposures institutions may derive LGD from realised losses and PDs, reflect future drawings either in conversion factors or LGD (with consistent numerator/denominator treatment) and use internal/external data for purchased receivables; retail LGD requires a minimum of five years’ data though competent authorities may permit two years initially while phasing to five. The EBA must draft RTS by 31 December 2014 specifying the nature, severity and duration of an economic downturn and conditions for two-year data permission (for adoption by the Commission) and issue guidelines clarifying treatment of funded and unfunded credit protection; by 31 December 2025 the EBA must publish updated guidance on artificial cash flows for cures and on discount-rate calibration for economic loss.