COMMISSION DELEGATED REGULATION (EU) 2023/1578

of 20 April 2023

supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards specifying the requirements for the internal methodology or external sources used under the internal default risk model for estimating default probabilities and losses given default

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (1), and in particular Article 325bp(12), third subparagraph, thereof,

Whereas:

(1) Article 325bp(5), point (e), and Article 325bp(6), point (d), of Regulation (EU) No 575/2013 require institutions that have not been granted permission to estimate default probabilities or losses given default in accordance with Part Three, Title II, Chapter 3, Section 1 of that Regulation for the purposes of calculating their own funds requirement for credit risk, to develop an internal methodology or to use external sources to estimate those default probabilities and losses given default for the purposes of calculating their own funds requirement for market risk referred to in Article 325bl of that Regulation. In order to ensure a level playing field across institutions in the Union, the requirements for such an internal methodology should be the same as those that apply to the methodologies used by institutions that have been permitted to estimate default probabilities or losses given default in accordance with Part Three, Title II, Chapter 3, of that Regulation. However, cases can be envisaged where, for the purposes of calculating their own funds requirement for market risk, institutions can neither rely on external sources of data, nor reasonably run their models in accordance with the requirements set out in Part Three, Title II, Chapter 3, of that Regulation, due to the lack of input data or disproportionate effort required. Therefore, it is necessary to lay down specific requirements that enable the institutions’ internal methodology used for the purposes of calculating the own funds requirement for market risk, or parts of it, to cover all such cases adequately. Those specific requirements should ensure prudent outcomes. At the same time, those requirements should meet specific needs in terms of timeliness and flexibility, including situations where positions for certain issuers are too small to require a complex methodology, and hence, a simpler methodology is more appropriate.

(2) Those specific requirements should only apply where necessary, that is, only where institutions can neither rely on external sources of data, nor reasonably run models satisfying the requirements set out in Part Three, Title II, Chapter 3, of Regulation (EU) No 575/2013. Therefore, conditions should be laid down to ensure that there are no other sources for estimating default probabilities and losses given default, and that the cases in which institutions can neither rely on external sources, nor reasonably run their models do not represent an excessive amount of their portfolios considering the requirements laid down in Article 325bn(1) of that Regulation. Institutions should assess those conditions frequently enough to take into account potential changes, including changes to the availability of external data sources, and considering the frequency with which the own funds requirements for market risk are reported.

(3) To enable institutions to take into account the characteristics of the positions for different issuers, including the materiality and holding periods of those positions, institutions should be allowed to develop internal methodologies for the estimation of default probabilities and losses given default which consist of different parts, to cover those different positions.

(4) It is necessary to ensure that the risk of default of individual issuers is sufficiently capitalised. The estimates of default probabilities and losses given default based on an internal methodology, or a part of it, should therefore be sufficiently conservative, having regard to other methodologies and sources used by the institutions. To that end, it is necessary to specify the conditions under which the estimates of default probabilities and losses given default will be sufficiently conservative. In particular, for those cases in which institutions can neither rely on external sources of data, nor reasonably run their models, limits should be set to the values that the estimates of default probabilities and losses given default may assume.

(5) Institutions that use external sources to estimate default probabilities and losses given default should, as part of the validation of the internal default risk model, periodically review the estimates produced to ensure that those estimates remain appropriate for the institutions’ portfolios. Institutions that use more than one external source should establish a hierarchy of those external sources to ensure the overall consistency of their use in the internal default risk model. Furthermore, institutions that use external sources to estimate default probabilities may have to undertake a number of steps and procedures before they can produce the actual estimates of default probabilities. It is therefore necessary to lay down requirements to ensure that the methodology used to produce estimates of default probabilities from external sources is conceptually sound in that it produces accurate and consistent estimates that are not biased.

(6) Article 325bp(11) of Regulation (EU) No 575/2013 requires institutions to document their internal models so that their correlation assumptions and other modelling assumptions are transparent to the competent authorities. To assist competent authorities in ensuring compliance with that requirement, it is necessary to specify how that general documentation requirement is to be applied to internal methodologies or external sources used under the internal default risk model for estimating default probabilities and losses given default.

(7) This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority.

(8) The European Banking Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (2),

HAS ADOPTED THIS REGULATION:

Article 1

Requirements for the internal methodology for estimating default probabilities

1. An institution’s internal methodology, or a part of it, used for estimating default probabilities in accordance with Article 325bp(5), point (e), of Regulation (EU) No 575/2013, shall fulfil the same requirements as those that apply to the methodologies used by institutions that have been permitted to estimate default probabilities in accordance with Part Three, Title II, Chapter 3 of that Regulation.

2. By way of derogation from paragraph 1, an institution’s internal methodology, or a part of it, for estimating default probabilities shall fulfil the requirements set out in paragraphs 3 or 4, as applicable, where, for a given issuer, all of the following conditions are met on a quarterly basis:

(a) no external sources fulfilling the requirements set out in Article 2 are already available for estimating default probabilities for that issuer;

(b) the use of an internal methodology, or a part of it, fulfilling the requirements set out in paragraph 1 is either:

(i) not feasible due to a lack of input data for that issuer; or

(ii) disproportionate in relation to the materiality or the holding period of the relevant positions for that issuer, based on the trading strategy adopted for such positions;

(i) lower than or equal to 10 %;

(ii) higher than 10 %, and the institution carries out all of the following:

(1) the institution investigates whether additional external sources fulfilling the requirements set out in Article 2 are available and uses those sources to reduce the value of ‘m’ to a value which is lower than or equal to 10 %;

(2) the institution conducts a sensitivity and scenario analysis to assess the qualitative and quantitative soundness of the internal methodology or part of it.

For the sensitivity analysis referred to in point (c)(ii)(2), the institution shall assess the sensitivity of the own funds requirements calculated in accordance with Article 325bn(1) of Regulation (EU) No 575/2013 in relation to all trading book positions referred to in Article 325bl of that Regulation. The institution shall do so by assigning to the issuers covered at the time of the calculation by the internal methodology or part of it, which fulfils the requirements set out in paragraphs 3 or 4, as applicable, one rating grade higher than and one rating grade lower than the one used to fulfil the requirements set out in those paragraphs.

3. Where the conditions set out in paragraph 2 are met, an institution’s internal methodology, or a part of it, shall assign to an issuer an estimate of default probability which is equal to or higher than the maximum of the following values:

(a) the highest default probability assigned to investment grade issuers of positions under the scope of the institution’s internal default risk model and for which the conditions set out in paragraph 2 are not met;

(b) the equally weighted average of default probabilities assigned to issuers of positions under the scope of the institution’s internal default risk model and for which the conditions set out in paragraph 2 are not met.

For the purposes of point (b), institutions may exclude defaulted issuers when calculating the equally weighted average of default probabilities, where they can ensure that the conditions set out in paragraph 2 are not met for such defaulted issuers.

4. By way of derogation from paragraph 3, where the conditions set out in paragraph 2 are met and the own funds requirements for default risk decrease as the value of default probability assigned to a given issuer increases, an institution’s internal methodology or a part of it shall assign to that issuer an estimate of default probability which is equal to or lower than the value assigned in accordance with paragraph 3, point (b).

5. For the purposes of paragraph 2, point (c), institutions shall calculate the value of ‘m’ in accordance with the following formula:

[Bild bitte in Originalquelle ansehen]

where:

DRC(full scope)

the own funds requirements calculated in accordance with Article 325bn(1) of Regulation (EU) No 575/2013 on the full scope of the trading book positions referred to in Article 325bl of that Regulation;

DRC(other methodologies and external sources)

the own funds requirements calculated in accordance with Article 325bn(1) of Regulation (EU) No 575/2013 relating exclusively to the trading book positions referred to in Article 325bl of that Regulation for the issuers of which the conditions set out in paragraph 2 are not met.

Article 2

Requirements for external sources for estimating default probabilities

1. When using external sources for estimating default probabilities in accordance with Article 325bp(5), point (e), of Regulation (EU) No 575/2013, institutions shall, in accordance with Articles 325bj(2) and 325bp(7) of that Regulation, validate the estimates of default probabilities on a periodic basis for their use in the internal default risk model.

2. Institutions shall obtain the estimates of default probabilities from external sources by employing a methodology that is conceptually sound and that fulfils the requirements set out in paragraph 4.

3. Institutions that use more than one external source shall establish a hierarchy of those external sources.

4. Before applying the floor referred to in Article 325bp(5), point (a), of Regulation (EU) No 575/2013, institutions shall ensure that the methodology referred to in paragraph 2 of this Article fulfils all of the following requirements:

(a) the methodology, based on the obligor grade scale used, where that scale could also be continuous, shall provide estimates of default probabilities corresponding to the applicable time horizon referred to in Article 325bp(5), point (b), of Regulation (EU) No 575/2013 that meet all of the following conditions:

(i) the estimates of default probabilities are considered accurate for all obligor grades having analysed their expected range of estimation errors;

(ii) the estimates of default probabilities are consistent across obligor grades;

(iii) the estimates of default probabilities provide a meaningful differentiation of risk and strictly increase as the creditworthiness of the obligor decreases;

(iv) the values of the estimates of default probabilities are not set to zero for an obligor grade solely on the basis that no defaults have been observed in the past for that obligor grade.

(b) where the methodology’s estimates of default probabilities are not derived in combination with current market prices, institutions shall analyse any differences they observe between those estimates and estimates that are derived in combination with current market prices, as referred to in Article 325bp(5), point (c), of Regulation (EU) No 575/2013.

Article 3

Requirements for the internal methodology for estimating losses given default

1. An institution’s internal methodology, or a part of it, used for estimating losses given default in accordance with Article 325bp(6), point (d), of Regulation (EU) No 575/2013 shall fulfil the same requirements as those that apply to the methodologies used by institutions that have been permitted to estimate losses given default in accordance with Part Three, Title II, Chapter 3 of that Regulation.

2. By way of derogation from paragraph 1, an institution’s internal methodology, or a part of it, for estimating losses given default shall fulfil the requirements set out in paragraphs 3 or 4, as applicable, where, in relation to a given position, all of the following conditions are met on a quarterly basis:

(a) no external sources fulfilling the requirements set out in Article 4 are already available for estimating losses given default for that position;

(b) the use of an internal methodology, or a part of it, fulfilling the requirements set out in paragraph 1 is either:

(i) not feasible due to a lack of input data for that position; or

(ii) disproportionate in relation to the materiality or the holding period of that position, based on the trading strategy adopted for that position;

(i) lower than or equal to 10 %;

(ii) higher than 10 %, and the institution investigates whether additional external sources fulfilling the requirements set out in Article 4 are available and uses those sources to reduce the value of ‘m’ to a value which is lower than or equal to 10 %.

3. Where the conditions set out in paragraph 2 are met, an institution’s internal methodology, or a part of it, shall assign to a position an estimate of loss given default which is equal to or higher than the following:

(a) 75 % for subordinated debt positions;

(b) 45 % for senior unsecured debt positions;

(d) 25 % for any other positions.

4. By way of derogation from paragraph 3, where the conditions set out in paragraph 2 are met and the own funds requirements for default risk decrease as the value of loss given default assigned to a given position increases, an institution’s internal methodology, or a part of it, shall assign to that position an estimate of loss given default which is equal to or lower than the values set out in paragraph 3.

5. For the purposes of paragraph 2, point (c), institutions shall calculate the value of ‘m’ in accordance with the formula set out in Article 1(5), where the term DRC (other methodologies and external sources) represents the own funds requirements calculated in accordance with Article 325bn(1) of Regulation (EU) No 575/2013 relating exclusively to the trading book positions referred to in Article 325bl of that Regulation for which the conditions set out in paragraph 2 are not met.

Article 4

Requirements for external sources for estimating losses given default

1. When using external sources for estimating losses given default in accordance with Article 325bp(6), point (d), of Regulation (EU) No 575/2013, institutions shall, in accordance with Articles 325bj(2) and 325bp(7) of that Regulation, validate the estimates of losses given default on a periodic basis for their use in the internal default risk model.

2. Institutions that use more than one external source shall establish a hierarchy of those external sources.

Article 5

Documentation

1. Institutions whose internal methodology, or a part of it, meets the conditions set out in Article 1(2) or Article 3(2), shall, in relation to all the issuers and positions covered under those Articles, document all of the following:

(a) that no external sources fulfilling the requirements set out in Article 2 or in Article 4, as applicable, are available for estimating default probabilities for those issuers and losses given default for those positions, respectively;

(b) that the use of an internal methodology fulfilling the requirements set out in Article 1(1) for estimating default probabilities for those issuers, or in Article 3(1) for estimating losses given default for those positions, respectively, would not be feasible due to a lack of input data, or that it would be disproportionate in relation to the materiality or the holding period in line with the trading strategy adopted for those issuers or positions;

2. Institutions shall keep an up-to-date inventory of the external data sources used for the purposes of Articles 2 and 4, which shall contain all of the following:

(a) a description of the methodologies used to obtain estimates of default probabilities from external sources in accordance with Article 2(1) and Article 2(2);

(b) documentation and underlying rationale where an institution has identified different terms, information or assumptions in accounting for expected credit losses and the estimates of default probabilities from external sources for exposures under the internal default risk model for the purpose of ensuring sound credit risk management, as approved by senior management;

(c) a description of the methodologies used to obtain estimates of losses given default from external sources in accordance with Article 4(1);

(d) the results of the validation performed in accordance with Article 2(1) and Article 4(1);

(e) the hierarchy of the external sources used, in accordance with Article 2(3) and Article 4(2).

For the purposes of point (a), where the estimates of default probabilities differ from those used in the institutions’ internal risk management methodologies and those differences are not due to the requirements set out in Article 325bp(5) of Regulation (EU) No 575/2013, those differences shall be part of the description of the methodologies.

For the purposes of point (c), where the estimates of losses given default differ from those used in the institutions’ internal risk management methodologies and those differences are not due to the requirements set out in Article 325bp(6) of Regulation (EU) No 575/2013, those differences shall be part of the description of the methodologies.

Article 6

Entry into force

This Regulation shall enter into force on the twentieth day following that of its publication in the

Official Journal of the European Union

This Regulation shall be binding in its entirety and directly applicable in the Member States.

Done at Brussels, 20 April 2023.

For the Commission

The President

Ursula VON DER LEYEN

(1)

OJ L 176, 27.6.2013, p. 1

(2) Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (

OJ L 331, 15.12.2010, p. 12