Featured Product

    EBA Consults on PD/LGD Estimation Under Internal Market Risk Approach

    July 22, 2020

    EBA proposed regulatory technical standards on default probabilities (PDs) and losses given default (LGDs) for default risk model for institutions using the new internal model approach under the Fundamental Review of the Trading Book (FRTB). These draft regulatory standards are part of the deliverables included in the June 2019 EBA roadmap for the new market and counterparty credit risk approaches. The proposed standards are based on the requirements specified in the Capital Requirements Regulation 2 or CRR2. The comment period for this consultation ends on October 22, 2020.

    The Capital Requirements Regulation 2 or CRR2, which amends Regulation No 575/20131, implements, in EU legislation, the revised requirements to compute own funds requirements for market risk. Institutions using an alternative internal model to compute own funds requirements for market risk and holding positions in traded debt and equity instruments in trading desks covered by the internal models approach permission are required to additionally compute an own funds requirement using an internal default risk model (or DRC). One of the requirements to be met under the internal default risk model is for institutions to be capable of modeling the default of individual issuers and the simultaneous default of multiple issuers as well as of computing the impact of those defaults on the market values of the positions that are included in the scope of that model. To simulate the default of issuers under the internal default risk model, institutions need to estimate PDs and LGDs of those issuers in accordance with the requirements set out in CRR2.  

    These draft regulatory standards specify the requirements that an institution’s internal methodology or external sources are to fulfill for estimating PD and LGD in accordance with CRR2. The proposed regulatory technical standards clarify the requirements to be met for the estimation of PDs and LGDs under the default risk model. The draft standards specify that any internal methodology used to calculate PDs and LGDs under the default risk model should meet all requirements applied for the Internal ratings‐based (IRB) approach. In addition, these standards specify the requirements that external sources are to fulfill for their use under the default risk model, thus reflecting similar qualitative requirements as those applicable to an internal methodology. External sources should provide estimates of PDs and LGDs that are appropriate with respect to the institution’s portfolio. These estimates should be validated on a periodic basis for their use under the default risk model. In case multiple external sources are used by an institution for the default risk model, the institution should provide a hierarchy of such sources, to ensure the overall consistency of PD and LGD estimates used in the model. Requirements were also added to specify more in detail how the general documentation requirement should be applied in the case of the external sources used by institutions for estimating PDs and LGDs.

     

    Related Links

    Comment Due Date: October 22, 2020

    Keywords: Europe, EU, Banking, Basel, Market Risk, FRTB, Probability of Default, Loss Given Default, Internet Model Approach, CRR2, Default Risk, EBA

    Featured Experts
    Related Articles
    News

    BCBS Consults on Principles for Operational Risk and Resilience

    BCBS is consulting on the principles for operational resilience and the revisions to the principles for sound management of operational risk for banks.

    August 06, 2020 WebPage Regulatory News
    News

    FSI Note Discusses Challenges Associated with COVID Relief Measures

    The Financial Stability Institute (FSI) of BIS published a brief note that examines the supervisory challenges associated with certain temporary regulatory relief measures introduced by BCBS and prudential authorities in response to the COVID-19 pandemic.

    August 06, 2020 WebPage Regulatory News
    News

    HKMA Announces Repayment Deferment Under Payment Holiday Scheme

    HKMA, together with the Banking Sector Small and Medium-Size Enterprise (SME) Lending Coordination Mechanism, announced a ninety-day repayment deferment for trade facilities under the Pre-approved Principal Payment Holiday Scheme.

    August 05, 2020 WebPage Regulatory News
    News

    ESRB Paper Presents Alternative Approach to EBA Stress Test Proposal

    The Advisory Scientific Committee of ESRB published a response, in the form of an Insights Paper, to the EBA proposals for reforms to the stress testing framework in EU.

    August 05, 2020 WebPage Regulatory News
    News

    MAS Announces Key Initiatives to Support Adoption of SORA

    MAS announced several initiatives to support adoption of the Singapore Overnight Rate Average (SORA), which is administered by MAS.

    August 05, 2020 WebPage Regulatory News
    News

    BoE Updates Template and Definitions for Form ER

    BoE updated the reporting template for Form ER as well as the Form ER definitions, which contain guidance on the methodology to be used in calculating annualized interest rates.

    August 05, 2020 WebPage Regulatory News
    News

    PRA to Extend Temporary High Balance Coverage Amid COVID Crisis

    PRA published the policy statement PS19/20 on the final policy for extending coverage under the Financial Services Compensation Scheme (FSCS) for Temporary High Balance.

    August 04, 2020 WebPage Regulatory News
    News

    EBA Publishes Standards on Disclosure and Reporting of MREL and TLAC

    EBA published the final draft implementing technical standards for disclosures and reporting on the minimum requirements for own funds and eligible liabilities (MREL) and the total loss-absorbing capacity (TLAC) requirements in EU.

    August 03, 2020 WebPage Regulatory News
    News

    EBA Releases Erratum for Phase 2 Package on Reporting Framework 2.10

    EBA published an erratum for the phase 2 of technical package on the reporting framework 2.10.

    August 03, 2020 WebPage Regulatory News
    News

    EC Sets Out Updated Technical Information for Solvency II Calculations

    EC published the Implementing Regulation 2020/1145, which lays down technical information for calculation of technical provisions and basic own funds.

    August 03, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5635