The European Banking Authority (EBA) published its final draft Regulatory Technical Standards (RTS) specifying the nature, severity and duration of an economic downturn. These RTS complete the EBA's regulatory review of the internal ratings-based (IRB) Approach, with the objective of restoring market participants' trust in internal models by reducing the unjustified variability in resulting risk weighted exposure amounts. The EBA is currently finalising the related Guidelines on the estimation of loss given default (LGD) appropriate for conditions of an economic downturn.

The final draft RTS set out the notion of economic downturn to be taken into account when estimating the LGD and the conversion factors (CF). Given the specificities of the types of exposures covered by a rating system, the economic downturn should be identified separately for each rating system. However, as a rating system may cover exposures from different businesses, sectors and geographical areas, the notion of an economic downturn included in these RTS may comprise several disjunctive downturn periods (e.g. where a rating system covers two sectors which experienced downturn conditions in different periods of time).