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The definition of loss used in estimating LGD is economic loss. When measuring economic loss, all relevant factors should be taken into account. This should include material discount effects and material direct and indirect costs associated with collecting on the exposure.
4.3.2
Banks should not simply measure the loss recorded in accounting records. They should be able to compare accounting and economic losses (some Banks may also adopt the concept of economic loss in their accounting records). Banks’ own workout and collection expertise significantly influences their recovery rates, and should be reflected in their LGD estimates. However, adjustments to estimates for such expertise should be conservative until a bank has maintained sufficient internal empirical evidence to manifest the impact of its expertise.
