On 21 March 2022, the European Banking Authority (EBA) published a final report containing draft regulatory technical standards (RTS) on requirements that an internal methodology or external sources used under the internal default risk model are to fulfil for estimating probabilities of default (PDs) and losses given default (LGDs) under Article 325bp(12) of the Capital Requirements Regulation (CRR). The draft RTS specify the requirements for estimating PDs and LGDs using an institution’s internal methodology or external sources. These draft RTS are part of the deliverables included in the roadmap for the new market and counterparty credit risk approaches.
The draft RTS have been developed according to Article 325bp(12) of the CRR, which mandates the EBA to specify the requirements that an institution’s internal methodology or external sources are to fulfil for estimating PDs and LGDs in accordance with point (e) of Article 325bp(5) and point (d) of Article 325bp(6).
The policy objective of the draft RTS is to establish common requirements for the internal methodology or external sources that institutions need to fulfil for estimating PDs and LGDs for the internal default risk model. These requirements aim to ensure that the PD and LGD estimates are appropriate and consistent across institutions. Generally, the draft RTS aim to create a level playing field, promote the convergence of institutions’ practices and enhance the comparability of own funds requirements across the EU.