Rating Models and Validation - Oesterreichische Nationalbank

Rating Models and Validation
I INTRODUCTION
The OeNB Guideline on Rating Models and Validation was created within a series
of publications produced jointly by the Austrian Financial Markets Authority
and the Oesterreichische Nationalbank on the topic of credit risk identification
and analysis. This set of guidelines was created in response to two important
developments: First, banks are becoming increasingly interested in the continued
development and improvement of their risk measurement methods and
procedures. Second, the Basel Committee on Banking Supervision as well as
the European Commission have devised regulatory standards under the heading
ÒBasel IIÓ for banksÕ in-house estimation of the loss parameters probability of
default (PD), loss given default (LGD), and exposure at default (EAD). Once
implemented appropriately, these new regulatory standards should enable banks
to use IRB approaches to calculate their regulatory capital requirements, presumably
from the end of 2006 onward. Therefore, these guidelines are intended
not only for credit institutions which plan to use an IRB approach but also for all
banks which aim to use their own PD, LGD, and/or EAD estimates in order to
improve assessments of their risk situation.
The objective of this document is to assist banks in developing their own
estimation procedures by providing an overview of current best-practice
approaches in the field. In particular, the guidelines provide answers to the following
questions:
— Which segments (business areas/customers) should be defined?
— Which input parameters/data are required to estimate these parameters in a
given segment?
— Which models/methods are best suited to a given segment?
— Which procedures should be applied in order to validate and calibrate models?
In part II, we present the special requirements involved in PD estimation
procedures. First, we discuss the customer segments relevant to credit assessment
in chapter 1. On this basis, chapter 2 covers the resulting data requirements
for credit assessment. Chapter 3 then briefly presents credit assessment
models which are commonly used in the market. In Chapter 4, we evaluate
these models in terms of their suitability for the segments identified in chapter
1. Chapter 5 discusses how rating models are developed, and part II concludes
with chapter 6, which presents information relevant to validating estimation
procedures. Part III provides a supplement to Part II by presenting the specific
requirements for estimating LGD (chapter 7) and EAD (chapter 8). Additional
literature and references are provided at the end of the document.
Finally, we would like to point out that these guidelines are only intended to
be descriptive and informative in nature. They cannot (and are not meant to)
make any statements on the regulatory requirements imposed on credit institutions
dealing with rating models and their validation, nor are they meant to
prejudice the regulatory activities of the competent authorities. References to
the draft EU directive on regulatory capital requirements are based on the latest
version available when these guidelines were written (i.e. the draft released on
July 1, 2003) and are intended for information purposes only. Although this
document has been prepared with the utmost care, the publishers cannot
assume any responsibility or liability for its content.
Guidelines on Credit Risk Management 7