Rating Models and Validation - Oesterreichische Nationalbank

Rating Models and Validation
Chart 38: Example of Weighting Optimization for Partial Scoring Functions
5.3 Calibrating the Rating Model
The objective of calibration is to assign a default probability to each possible
overall score, which may be a grade or other score value. The default probabilities
themselves can be classified into as many as about 20 rating classes, mainly
in order to facilitate reporting. Assigning default probabilities to rating results is
crucial in order to meet the minimum requirements of the IRB approach under
Basel II and the proposed EU directive. 61
In order to fulfill these minimum requirements, the rating scale used has to
include at least seven rating classes (i.e. grades) for non-defaulted borrowers
and one class for defaulted borrowers, except in the retail segment. 62
In practice, banks frequently use what is referred to as a master scale, that is, a
uniform rating scale which is used throughout the bank and into which all rating
results for segment-specific rating procedures are mapped. The advantage of this
approach is the resulting comparability of rating results across all rating segments.
As each segment is characterized by specific features, especially with regard
to average default probability rates, separate segment-specific calibration is necessary
for each rating model. In the calibration process, the bandwidth of rating
results (e.g. score value ranges) to be assigned to each rating class on the master
scale is determined (see chart 39). With regard to model types, the following
factors are to be differentiated in calibration:
— Logistic regression (see section 3.2.2) already yields rating results in the form
of sample-dependent default probabilities, which may have to be rescaled to
each segmentÕs average default probability (see section 5.3.1).
61 Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Annex D-1, No. 1.
62 Cf. EUROPEAN COMMISSION, draft directive on regulatory capital requirements, Annex D-5, No. 8.
84 Guidelines on Credit Risk Management