European Banking Authority Consults on Technical Standards for Estimating Default Probabilities and Losses Given Default under CRR 2

The European Banking Authority has published draft Regulatory Technical Standards on the requirements for the internal methodologies or external sources to be used for estimating default probabilities and losses given default for firms subject to the revised Capital Requirements Regulation (CRR 2). Responses to the consultation should be submitted by October 22, 2020.

CRR 2 introduced a series of changes to the Capital Requirements Regulation, including revised requirements for firms to compute own funds requirements for market risk. Firms using an alternative internal model for computing own funds requirements for market risk must also compute own funds using an internal default risk model. This internal default risk model must be capable of modelling the default of individual issuers and the simultaneous default of multiple issuers. To simulate such defaults, firms must be able to estimate default probabilities and the relevant loss given default in accordance with specified provisions of CRR 2. Firms that have not been granted permission to perform these estimates in accordance with CRR must develop an internal methodology or use external sources to produce the estimates. The EBA's draft RTS establish the requirements for those internal methodologies or external sources.

View the EBA's draft RTS on estimating default probabilities and losses given default.

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