CP10 (Full Document) - European Banking Authority

should start with inputs, and those inputs should be essentially the
same whether used for credit management purposes or for
regulatory calculation purposes.
138. The rating systems used for rating obligors and exposures and for
estimating risk parameters used in the calculation of capital
requirements must also play an essential role in the relevant
processes and functions of the institution. Moreover, the structure
and design of the rating systems and capital calculation systems
should not be fundamentally different, whatever the purpose,
internal or regulatory.
139. Any differences between the ratings and risk parameter estimates
used in calculating capital requirements and the final parameters
used internally should rely on a well documented rationale. There
should be a robust audit trail, adhering to a specified internal policy.
The purpose of this policy should be to assess the materiality of
differences and whether they lead to conservatism or relaxation in
capital adequacy. When pricing margins are calculated using non­IRB
data, it would be useful for the institution to sort out both types of
margins calculations and include conservatism in the calculation of
the regulatory capital requirements. The more numerous the
differences between the regulatory and the internal systems, the
higher the internal governance standards should be.
140. In areas relating to the credit risk assessment process (ratings, etc.)
the final parameters used for internal purposes and the data used in
calculating capital requirements are expected to be strictly in line. On
the other hand, some flexibility is seen as possible for pricing and
internal capital allocation. Not any internal used final default or loss
estimate should render the estimate used in the calculation of capital
requirements un­plausible.
141. Inputs identified as major for credit risk selection, estimation, and/or
management for internal purposes should not be set aside for
assigning ratings and estimating risk parameters used in the
calculation of capital requirements. Credit selection in the corporate
exposure class depends heavily on the financial statements of the
corporates, This source of information and related analysis should
not be missing from the criteria used for regulatory rating and PD
estimation purposes.
142. Special attention will be given to LGDs and CFs. These parameters
must have been estimated and used in a broadly consistent manner
for three years prior to permission being granted. This period may be
reduced to no less than two years until 31 December 2008, during
the experience test (see below), and during use test in a full
consistent manner for a period appropriate to ensure accuracy and
consistency of those estimates according to Article 84(2) (b) before
their usage for calculation of regulatory capital requirements can be
validated.
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