In accordance with Article 500(1) of the Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876, subject to conditions specified in points (a) to (c) of that article and by way of derogation from Article 181(1)(a), institutions may adjust their LGD estimates “by partly or fully offsetting the effect of massive disposals of defaulted exposures on realised LGDs”. Consequently, in order to derive adjusted LGD estimates, institutions should adjust the realised LGDs on disposed exposures, which were included in the massive disposal plan. Such adjustment should reflect exclusively the impact on the obtained sale price of the assets due to the massive nature of the disposal, which may have led to a larger than usual discount, but it should not affect any other elements; in particular, it should not offset the impact of economic conditions. For this purpose only the cash flows directly related to the massive disposal can be adjusted, and any recoveries, costs or discounting effects realised on these exposures before the sale must remain unchanged.

Institutions should use the method or methods for adjusting realised LGDs, which are the most appropriate for the portfolio subject to the massive disposal, taking into account the principles and objectives described above. Possible methods for LGD adjustment to be considered include inter alia the following two methods:

• Institutions may adjust realised LGDs for exposures subject to massive disposals to the LGDs of the disposed assets as of the date just before the disposal, calculated in accordance with the methods for the treatment of incomplete recovery processes as described in paragraphs 153 to 159 of the EBA Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures (EBA/GL/2017/16). This would be equivalent to the assumption that the exposures subject to massive disposal have not been finally liquidated. Under this approach, institutions should consider the disposed assets as of the date just before the disposal to be the “comparable exposures in default that have not been liquidated”.
• Institutions that sell their portfolios of defaulted exposures on a regular basis may assume that exposures belonging to a portfolio subject to the massive disposal were subject to a normal portfolio sale rather than a massive disposal, but adjust the cash flow from the sale by taking into account the usual discount related to the sale of such exposures and the specific risk characteristics of the exposures disposed in a massive disposal. Under this approach, the comparable exposures in default that have not been liquidated” should be understood as similar defaulted exposures sold in the past on a regular basis.

Different methods may be appropriate for different sales or parts of portfolios subject to the massive disposal.

Disclaimer:

The answers clarify provisions already contained in the applicable legislation. They do not extend in any way the rights and obligations deriving from such legislation nor do they introduce any additional requirements for the concerned operators and competent authorities. The answers are merely intended to assist natural or legal persons, including competent authorities and Union institutions and bodies in clarifying the application or implementation of the relevant legal provisions. Only the Court of Justice of the European Union is competent to authoritatively interpret Union law. The views expressed in the internal Commission Decision cannot prejudge the position that the European Commission might take before the Union and national courts.