EBA Publishes Standards Under Internal Approach for Market Risk
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.
Related Links
- 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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
FED Announces Multiple Developments on Regulatory FrontRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.