Circular Letter No. CC/2020/00000039

Circular Letter No. CC/2020/00000039 Sent to: Credit Institutions. Mod. 40000375/T – 01/14 Subject: EBA Guidelines on LGD estimates adequate to a downturn situation (“LGD Estimation for a Downturn Situation”) (EBA/GL/2019/03)

The European Banking Authority (EBA) published, on March 6, 2019, the “Guidelines on LGD estimates adequate to a downturn situation (“LGD Estimation for a Downturn Situation”) (EBA/GL/2019/03)”, which will enter into force on January 1, 2022 (1). These Guidelines can be consulted from the EBA’s respective website (2).

The aforementioned document contains guidelines for the estimation of the Loss Given Default (LGD) adequate for a downturn situation and apply to the IRB method, in accordance with Part III, Title II, Chapter 3, Section 6 of Regulation (EU) No 575/2013, for all methods based on own estimates of LGD.

Credit institutions supervised by the Bank of Portugal that apply the IRB method in accordance with Part III, Title II, Chapter 3, of Regulation (EU) No 575/2013 must adopt the necessary measures to comply with the aforementioned Guidelines starting from January 1, 2022.

The Bank of Portugal highlights the importance of institutions giving adequate compliance with the guidelines contained in the document in question, which must be followed and applied in the context of current legislation and regulation and, in particular, function as a complement to the provisions contained in the General Regime of Credit Institutions and Financial Companies regarding the matters in question.

(1) In the original plan, these Guidelines had a deadline for entry into force of January 1, 2021. However, according to the PROGRESS REPORT ON THE IRB ROADMAP, published by the EBA on July 9, 2019, the deadline for entry into force was postponed by one year, i.e., until January 1, 2022. (2) https://eba.europa.eu/documents/10180/2759150/Guidelines+on+LGD+estimates+under+downturn conditions_PT.pdf/840a6ee6-5b4b-4f32-984a-91c462ae12d4