The European Banking Authority (EBA) published the final draft regulatory technical standards on probabilities of default (PDs) and losses given default (LGDs) for default risk model for institutions using the new internal model approach for market risk.
These final draft regulatory technical standards, under the revised Capital Requirements Regulation or CRR2, specify the requirements for estimating PDs and LGDs using an institution's internal methodology or external sources. Institutions using the internal model approach to compute own funds requirements for market risk are required to compute additional own funds requirement using an internal default risk model for their positions in traded debt and equity instruments included in internal model approach trading desks. The final draft regulatory technical standards specify that an internal methodology used to calculate PDs and LGDs under the default risk model should meet all requirements applicable to the corresponding Internal ratings‐based (IRB) approach. In addition, the draft standards include the possibility for institutions to produce conservative "fallback" PD and LGD values to be used only where needed. 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.
The consultation period for these draft regulatory standards lasted for three months and ended on October 22, 2020. Post consultation, EBA considered the feedback provided by two respondents in finalizing them. The draft regulatory standards represent a part of the deliverable of the second phase of the EBA roadmap for the new market and counterparty credit risk approaches published on June 27, 2019. They constitute a further contribution to a smooth and harmonized implementation of the Fundamental Review of the Trading Book, or FRTB, international standards in the European Union.
- Press Release
- Report on Final Standards (PDF)
- Proposed Standards, June 202 (PDF)
- Roadmap for Market and Counterparty Credit Risk Approaches (PDF)
Keywords: Europe, EU, Banking, Market Risk, CRR, FRTB, Internal Models, Counterparty Credit Risk, Basel, Regulatory Capital, Default Risk Model, EBA, Subheadline
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