CP10 (Full Document) - European Banking Authority

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274. The documentation must also reflect the fact that different rating systems can be used for different portfolios. Supervisors would expect institutions to maintain different sets of documentation on development, validation, and operations of each rating system or combination of rating systems used and of the portfolios to which they are applied. 275. All documentation relating to an institution’s rating systems should be made available to the competent authority upon request, and to a third party acting as its agent. 276. Section 3.3.4. applies to all documentation regarding model development and validation, including rating systems and PD, LGD, and CF estimation. 277. The documentation of statistical models and other mechanical methods should cover at least the following areas: 1. Documentation of model design: · Delineation criteria for the rating segment · Description of the rating method, the type of model used, and the architecture of the model · Model architecture and fundamental assumptions, including the definitions of default, the rationale for and analysis supporting the choice of rating criteria, typical circumstances under which the model does not work effectively, and the general strength and weaknesses of the model · The reason for selecting a specific model type · Documentation of all model functions · Description of the rating process · Duties and responsibilities with regard to the rating model · Model change policy 2. Documentation of development and analyses · Relevance of the criteria used in the model · Dataset used in rating development · Quality assurance for the dataset · Model development procedure · Selection of model input factors and assessment of model parameters · Quality assurance/validation during model development, including at least outoftime and/or outofsample performance tests. · Calibration of model output to default probabilities · Procedure for validation/regular review · Use of human judgement to complement the model 278. Tests for quality assurance/validation should be performed only if the data needed to set aside for them do not unduly reduce the data set for model development. In cases of scarce data, it might be more Page 64 of 123
advisable in some circumstances not to set aside an outofsample data set, but rather to wait until the following year and the respective new rating assignments, and use them as an outoftime sample. 3.3.5. External vendor models 279. Annex VII, Part 4, Paragraph 36 states that the use of a model obtained from a thirdparty vendor that claims proprietary technology is not a justification for exemption from documentation or any other of the requirements for rating systems. Thus these models generally have to fulfil the same requirements as models produced inhouse. 280. In particular, Annex VII, Part 4, Paragraph 31 requires institutions to prove that all models used (including external models) have good predictive power, that the data used to build the model is representative of the actual portfolio of the institution, and that a regular cycle of model validation is in place. The burden is on the institution to satisfy competent authorities that it complies with these requirements. In other words, supervisors will not validate external vendors. 281. Under the IRB approach, institutions can use statistical models in the rating process and/or to estimate the risk parameters required for the approach. Although it should be emphasised that the rating process in total should be an internal rating process, it is not necessary that all parts of the process be developed internally. Most institutions use externally developed statistical models to some extent in their rating process. 282. In the context of these guidelines, an external vendor model is a model or parts of a model used by an institution and developed by an independent external third party that uses certain inputs to assign exposures to certain rating grades or to estimate certain risk parameters. 283. In addition to the general requirements mentioned above, the transparency of the vendor model and of its linkage to the internal information used in the rating process will be examined closely by supervisors. Transparency of the vendor model 284. To fulfil the CRD’s requirements regarding internal governance (Annex VII, Part 4, Paragraphs 123 to 126) and the requirements regarding the responsibilities of the Credit Risk control unit (Paragraphs 127 to 129) and the Internal Audit unit (Paragraphs 130) for external vendor models, the institution has to prove that it understands the external model in all its aspects. The supervisor’s assessment of the institution’s use of external models will therefore Page 65 of 123
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CEBS CP 10 11 July 2005 Guidelines
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ANNEXES ...........................
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to use these approaches. 6. The gui
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IRB approach can be given only if t
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approaches for regulatory purposes
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purposes, when the group has submit
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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
Page 55 and 56: 228. In principle, supervisors do n
Page 57 and 58: prices on defaulted exposures, and
Page 59 and 60: LGD estimation, they have to be tak
Page 61 and 62: The exposure value for the followin
Page 63: investigating the potential drivers
Page 67 and 68: terms) the proof of consistency wit
Page 69 and 70: 302. The information used in credit
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Page 73 and 74: Pooled data sets for good predictiv
Page 75 and 76: inputs to the IRB approach. Supervi
Page 77 and 78: used to quantify the risk parameter
Page 79 and 80: years for the economy as a whole, a
Page 81 and 82: · Institutions must be able to bri
Page 83 and 84: Benchmarking the outputs of interna
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Page 87 and 88: systems” (Annex VII, Part 4, Para
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Page 91 and 92: organisational point of view (e.g.,
Page 93 and 94: conclusions are wellfounded. Inte
Page 95 and 96: 401. The role played by the CRC fun
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Page 103 and 104: Principles and examples 1. The purp
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· Development of internal processe
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· Understanding the extent and nat
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‣ If not, inform the other superv
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the decision. ‣ Agree on the proc
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