Long-run average default rate
For the purpose of determining the historical observation period referred to in Articles 180(1)(h) and 180(2)(e) of Regulation (EU) No 575/2013, additional observations to the most recent 5 years, at the time of model calibration, should be considered relevant when these observations are required in order for the historical observation period to reflect the likely range of variability of default rates of that type of exposures as referred to in Article 49(3) of the RTS on IRB assessment methodology.
For the purpose of assessing the representativeness of the historical observation period referred to in paragraph 82 for the likely range of variability of one-year-default rates, institutions should assess whether the historical observation period contains a representative mix of good and bad years, and they should take into account all of the following:
the variability of all observed one-year-default rates;
the existence, lack or prevalence of one-year default rates relating to bad years as reflected by economic indicators that are relevant for the considered type of exposures within the historical observation period;
significant changes in the economic, legal or business environment within the historical observation period.
Where the historical observation period referred to in paragraph 82 is representative of the likely range of variability of the default rates, the long-run average default rate should be computed as the observed average of the one-year default rates in that period.
Where the historical observation period referred to in paragraph 82 is not representative of the likely range of variability of default rates as referred to in Article 49(4) of the RTS on IRB assessment methodology, institutions should apply the following:
where no or insufficient bad years are included in the historical observation period the average of observed one year default rates should be adjusted in order to estimate a long-run average default rate;
where bad years are over-represented in the historical observation period, the average of observed one-year default rates may be adjusted to estimate a long-run average default rate where there is a significant correlation between economic indicators referred to in paragraph 83(b) and the available one-year default rates.
Institutions should ensure that, as a result of the adjustments referred to in points (a) and (b), the adjusted long-run average default rate reflects the likely range of variability of default rates.
In the exceptional case where the long-run average default rate is below the average of all observed one-year default rates due to any adjustment made in accordance with paragraph 85, institutions should compare their adjusted long-run average default rates with the higher of the following:
the observed average of the one-year default rates of the most recent 5 years;
the observed average of all available one-year default rates.
Institutions should justify the direction and magnitude of the adjustment, including the adequacy of the considered MoC, in line with the requirement in Article 49(4)(b) of the RTS on IRB assessment methodology and section 4.4. In addition, where the adjusted long-run average default rate is lower than the higher of the two values referred to in points (a) and (b), they should specifically justify why these two values are not appropriate.