EBA publishes RTS on PD & LGD under the default risk model for FTBS-IMA

2022/03/21

The European Banking Authority (EBA) published its final draft regulatory technical standards (RTS) specifying the requirements for estimating probabilities of default (PDs) and losses given default (LGDs) under the default risk model for institutions using the new internal model approach (IMA) under the Fundamental Review of the Trading Book (FRTB), as required for the calculation of additional own funds requirements for market risk for positions in traded debt and equity instruments included in IMA trading desks. According to the draft RTS, 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. The draft RTS also include the possibility for institutions to produce conservative ‘fallback’ PD and LGD values to be used only where needed. And the RTS specify the requirements on external sources for their use under the default risk model to ensure the soundness of the methodology employed to derive PDs and LGDs from these sources.