Rating Models and Validation - Oesterreichische Nationalbank

Rating Models and Validation
With regard to pooling in mass-market banking, Basel II requires the following
minimum segmentation: 118
— Exposures secured by real estate
— Qualifying revolving retail exposures
— All other retail exposures
Beyond this basic segmentation, banks can also segment exposures according
to additional criteria. In this context, it may also be sensible from a business
prespective to subdivide exposures further by product type and degree of collateralization.
One essential requirement is that each group consists of a large
number of homogenous exposures. 119
Due to the pooling of exposures, specific transactions — and thus also their
potential recoveries — can no longer be regarded individually. Accordingly,
pooling makes it possible to apply the poolÕs historical book value loss percentage,
which applies equally to all transactions in a pool. This is also the case for
the two other loss parameters (interest loss and processing costs). The table
below gives an overview of the loss components relevant to mass-market banking.
Chart 84: Loss Components in Mass-Market Banking
7.3 Identifying Information Carriers for Loss Parameters
For the purpose of selecting and assessing individual methods of estimating
LGD, it is necessary to identify the main information carriers for each loss
parameter. Breaking down loss parameters into their separate components enables
direct assignment and at the same time reduces complexity in the application
of estimation methods.
7.3.1 Information Carriers for Specific Loss Parameters
Non-Retail Information Carriers
The following information carriers are relevant to the loss parameters in nonretail
business:
— Customers: Creditworthiness information, assigned collateral and transactions,
customer master data (customer type, industry, region, etc.)
118 Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Article 47, No. 7.
119 Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Article 47, No. 5.
144 Guidelines on Credit Risk Management