CP10 (Full Document) - European Banking Authority

76. The issues that supervisors are expected to assess can be broken
down into five phases: 8
1. Methodology and documentation.
2. Data quality.
3. Quantitative procedures.
4. Qualitative procedures.
5. Technological environment.
77. In assessing IRB applications, the issues are:
1. Methodology and documentation: Supervisors will examine and
assess the rating system methodology and the quality of internal
documentation supporting the rating system.
2. Data quality: Supervisors will assess the quality of data and
databases being used for the development of the rating systems,
in the rating assignment process, and in the estimation of risk
parameters, along with any other databases needed to calculate
minimum regulatory capital. This is to ensure the soundness of
calibration and of the capital calculation. (The latter holds true
also for the other four items mentioned here.)
3. Quantitative procedures: Supervisors will assess the quantitative
information provided by the applicant relating to performance,
validation, and monitoring of rating systems. Supervisors may ask
applicants to undertake additional analyses and may undertake
quantitative procedures of their own.
4. Qualitative procedures: This phase has two objectives. The first is
to perform an overall assessment of the quality of the internal
model. This involves integrating all the information generated in
the previous phases and discussing with the applicant the
appropriate interpretation of the data with respect of the quality
of the rating system. The second objective is to assess
compliance with the qualitative minimum regulatory
requirements. Supervisors will assess the use test, internal
governance, the role of senior management, the adequacy of
internal controls, and other areas in order to assess the
qualitative aspects of the rating system that have a bearing on
the approval and to check for compliance with the minimum
qualitative requirements.
5. Technological environment: Supervisors will evaluate the
reliability and integration of systems, the functionality of the
model, and the quality of information provided by systems.
78. In assessing AMA applications, the issues are:
8 The phases are numbered, suggesting a certain logical order, although in practice some
phases will probably overlap.
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