The European Banking Authority (EBA) has published Guidelines on probability of default estimation, loss given default estimation and the treatment of defaulted exposures.

The guidelines specify the requirements for the estimation of probability of default (PD) and loss given default (LGD), including LGD for defaulted exposures and best estimate of expected loss in accordance with Part Three, Title II, Chapter 3, Section 6 of the Capital Requirements Regulation (CRR), Article 159 of the CRR and the EBA final draft regulatory technical standards on the IRB assessment methodology of 21 July 2016.

The guidelines apply in relation to the IRB Approach in accordance with Part Three, Title II, Chapter 3 of the CRR for all methods based on own estimates of PD and LGD. Where, for exposures other than retail, an institution has received permission to use the IRB Approach but has not received permission to use own estimates of LGD in accordance with Article 143(2) in conjunction with Article 151(8) to (9) of the CRR, all parts of the guidelines apply, except chapters 6 (LGD estimation) and 7 (estimation of risk parameters for defaulted exposures). The guidelines do not apply to the calculation of own funds requirements for dilution risk in accordance with Article 157 of the CRR.

The guidelines apply from 1 January 2021. Institutions should incorporate the requirements of these guidelines in their rating systems by that time, but Member State competent authorities may accelerate the timeline of this transition at their discretion.

View Final EBA guidelines on application of IRB approach under CRR, 20 November 2017