For exposures for which own conversion factor estimates can be used (exposures specified in Article 166 (8)) the conversion factor estimate should reflect drawings up to and after the time a default event is triggered. To align the outstanding at default amount used in the conversion factor estimate with the denominator of the realized LGD, the denominator of the realized LGD should also include additional drawings after the time the default event is triggered. This is described in paragraphs 140 and 141 of EBA/GL/2017/16.

Note that EBA paragraphs 140 and 141 are only relevant for products for which own estimates of conversion factors are used. No specifications are provided by EBA on how to treat additional drawings related to products in scope of CRR article 166 (10).

For the purpose of calculating the realized LGD for exposures in scope of Article 166 (10) of Regulations (EU) No 575/2013 (CRR) that are fully off-balance at the moment of default, but come on balance during the default period, the following options can be considered to calculate the denominator of the realized LGD:

1. The denominator of the realized LGD is calculated as the sum of discounted drawings (e.g. claims under a guarantee) during the default period, or
2. The denominator of the realized LGD is calculated as the exposure value at default, which is calculated as the regulatory prescribed conversion factor times the value of the off-balance sheet item, or
3. The denominator of the realized LGD is calculated as on-balance exposure at default moment and equals to zero, no realized LGD can be calculated and consequently the exposure is excluded from LGD estimation, or
4. The denominator of the realized LGD is calculated as the drawn part of the commitment, irrespective of whether this drawn part is considered on- or off-balance for accounting purposes.

In the context of option 4, the drawn part of a commitment refers to the amount to which a credit facility to provide off-balance sheet products to an obligor has been used by the obligor.

To illustrate these options an explicit example is provided.

Suppose an institution provides to a customer a facility to provide bank guarantees. The customer can draw guarantees under this facility up to a pre-specified limit of 100. The original maturity of the facility is more than one year. Suppose for simplicity that this facility is the only product offered to the customer. Suppose further that the borrower defaults and at the moment of default, guarantees up to an amount of 50 have been drawn by the customer and no guarantees have yet been claimed by the beneficiaries of those guarantees up to the default moment. During the default period a guarantee in the amount of 25 is claimed by the beneficiary of that guarantees.

In this example, the on-balance exposure at the default moment is zero and, for the purpose of calculating the realized LGD, the denominator of the realized LGD would be calculated under the four options described above as:

1. The denominator of the realized LGD is equal to 25 discounted from the moment the guarantee is claimed to the default moment.
2. The denominator of the realized LGD is equal to the exposure value, which is equal to 75 (a full risk item of 50 plus a medium risk item of 50).
3. The denominator of the realized LGD is equal to zero, no realized LGD is calculated and the exposure is not included in the LGD estimation.
4. The denominator of the realized LGD is taken equal to the drawn amount, which is equal to 50.