22 July 2020
The European Banking Authority (EBA) launched a consultation on draft Regulatory Technical Standards (RTS) on default probabilities (PDs) and losses given default (LGDs) for default risk model for institutions using the new Internal Model Approach (IMA) under the Fundamental Review of the Trading Book (FRTB). These draft RTS are part of the deliverables included in the roadmap for the new market and counterparty credit risk approaches published on 27 June 2019. The consultation runs until 22 October 2020.
Institutions using the IMA 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 IMA trading desks.
These draft RTS clarify the requirements to be met for the estimation of PDs and LGDs under the default risk model. In particular, the draft RTS 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 RTS specify the requirements that external sources are to fulfil for their use under the default risk model, thus reflecting similar qualitative requirements as those applicable to an internal methodology.
Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. Please note that the deadline for the submission of comments is 22 October 2020. All contributions received will be published following the end of the consultation, unless requested otherwise.
A public hearing will take place via conference call on 17 September 2020 from 15.30 to 17.30 CET. The dial in details will be communicated in due course.
These draft RTS have been developed according to Article 325bp(12) of Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR), which mandates the EBA to “specify the requirements that an institution's internal methodology or external sources are to fulfil for estimating default probabilities and losses given default in accordance with point (e) of Article 325bp(5) and point (d) of Article 325bp(6)”.