CP10 (Full Document) - European Banking Authority

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3.3.1.2.1. SMEs in the corporate exposure class ......................41 3.3.1.2.2. Specialised lending ...............................................42 3.3.2. Definition of loss and default..............................................44 3.3.2.1. Definition of default ....................................................44 3.3.2.2. Definition of loss ........................................................47 3.3.3. Rating systems and Risk quantification ................................49 3.3.3.1. Probability of Default (PD) ...........................................49 3.3.3.2. Loss Given Default (LGD) ............................................51 3.3.3.3. Conversion Factors .....................................................57 3.3.4. Quality of internal documentation .......................................63 3.3.5. External vendor models ....................................................65 3.4. Data....................................................................................67 3.4.1. Data accuracy, completeness and appropriateness ................68 3.4.2. Data quality standards and consistency with accounting data ..69 3.4.3. Representativeness of data used for model development and validation ................................................................................70 3.4.4. Data sources and definition of default..................................73 3.5. Quantitative and qualitative validation and its assessment ...........74 3.5.1. High level principles on validation .......................................74 3.5.2. Validation tools: Benchmarking and Backtesting ...................81 3.5.3. Low default portfolios .......................................................83 3.6. Internal governance...............................................................85 3.6.1. Role of the management body ...........................................87 3.6.2. Independent Credit Risk Control unit...................................90 3.6.3. Role of internal audit ........................................................92 3.6.4. Independence/conflict of interests in rating assignment .........93 3.6.5. Reliance on the work of external auditors in the review process .............................................................................................95 4. Supervisor’s assessment of the application concerning the minimum requirements of the CRD – Operational Risk ........................................96 4.1. Partial use combinations .........................................................96 4.2. Simpler approaches (BIA/TSA/ASA)..........................................98 4.2.1. Entry criteria and use of TSA and ASA .................................98 4.2.2. General and specific conditions for the use of ASA.................99 4.2.3. Relevant indicator: Three years average..............................99 4.3. AMA .................................................................................. 100 4.3.1. Rollout........................................................................ 100 4.3.2. Use test ....................................................................... 102 4.3.3. Data ............................................................................ 104 4.3.4. Parameter estimation and validation ................................. 106 4.3.4.1. Combination of the four elements ............................... 107 4.3.4.2. AMA four elements: qualitative inputs.......................... 108 4.3.4.3. Insurance haircuts for policies with a residual term less than one year............................................................................. 109 4.3.4.4. Allocation methodology for AMA institutions on a group wide basis.................................................................................. 109 4.3.5. Internal governance ....................................................... 109 Page 2 of 123
ANNEXES .................................................................................... 116 List of acronyms: AIG AMA ASA BCBS BIA CEBS CF CRCF CRCU CRD ECAI HVCRE IRB Approach LGD LTV ORMF PD RDS SL SME TSA Accord Implementation Group Advanced Measurement Approach Alternative Standardised Approach Basel Committee on Banking Supervision Basic Indicator Approach Committee of European Banking Supervisors Conversion Factors Credit Risk Control Function Credit Risk Control Unit Capital Requirements Directive External Credit Assessment Institution High Volatility Commercial Real Estate Internal Ratings Based Approach Loss Given Default Loantovalue Operational Risk Management Function Probability of Default Reference Data Set Specialised Lending Small and Medium Sized Entities The Standardised Approach Page 3 of 123
Page 1: CEBS CP 10 11 July 2005 Guidelines
Page 5 and 6: to use these approaches. 6. The gui
Page 7 and 8: IRB approach can be given only if t
Page 9 and 10: approaches for regulatory purposes
Page 11 and 12: purposes, when the group has submit
Page 13 and 14: efficient running of the process, u
Page 15 and 16: and/or 105 of the CRD, subject to t
Page 17 and 18: 58. Institutions intending to move
Page 19 and 20: translated, supervisors will organi
Page 21 and 22: 76. The issues that supervisors are
Page 23 and 24: holding company, the competent auth
Page 25 and 26: · A new approval process shall not
Page 27 and 28: · Institutions may not be ready to
Page 29 and 30: 2. Asking institutions to notify su
Page 31 and 32: 116. ‘Immaterial’ should refer
Page 33 and 34: 128. The EU Council has proposed th
Page 35 and 36: should start with inputs, and those
Page 37 and 38: to be only broadly compliant with t
Page 39 and 40: institutions to be able to identify
Page 41 and 42: differentiated if their loss rates
Page 43 and 44: payments are originating from the s
Page 45 and 46: any of its subsidiaries in full, wi
Page 47 and 48: 197. As a general rule, the rating
Page 49 and 50: · Their discounting method results
Page 51 and 52: grades. In this case, all of the re
Page 53 and 54:
of challenges, including choosing t
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228. In principle, supervisors do n
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prices on defaulted exposures, and
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LGD estimation, they have to be tak
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The exposure value for the followin
Page 63 and 64:
investigating the potential drivers
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advisable in some circumstances not
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terms) the proof of consistency wit
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302. The information used in credit
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exposures to obligors or facilities
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Pooled data sets for good predictiv
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inputs to the IRB approach. Supervi
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used to quantify the risk parameter
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years for the economy as a whole, a
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· Institutions must be able to bri
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Benchmarking the outputs of interna
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model, and the internal use of the
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systems” (Annex VII, Part 4, Para
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· Examining reports from Internal
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organisational point of view (e.g.,
Page 93 and 94:
conclusions are wellfounded. Inte
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401. The role played by the CRC fun
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subsidiary, or by different subsidi
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way of a formal notification). The
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· The rollout plan should have a
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Principles and examples 1. The purp
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etween systems, recording of data t
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· The definition of an appropriate
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incorporate forwardlooking elemen
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· Approving proactive risk managem
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frequency and format of the interna
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· Development of internal processe
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· Understanding the extent and nat
Page 119 and 120:
‣ If not, inform the other superv
Page 121 and 122:
the decision. ‣ Agree on the proc
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