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CRR ToolDelegated Regulation 2023/1578
Article 2

Article 2 - Requirements for external sources for estimating default probabilities

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.