CP10 (Full Document) - European Banking Authority
CP10 (Full Document) - European Banking Authority
CP10 (Full Document) - European Banking Authority
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advisable in some circumstances not to set aside an outofsample<br />
data set, but rather to wait until the following year and the<br />
respective new rating assignments, and use them as an outoftime<br />
sample.<br />
3.3.5. External vendor models<br />
279. Annex VII, Part 4, Paragraph 36 states that the use of a model<br />
obtained from a thirdparty vendor that claims proprietary<br />
technology is not a justification for exemption from documentation or<br />
any other of the requirements for rating systems. Thus these models<br />
generally have to fulfil the same requirements as models produced<br />
inhouse.<br />
280. In particular, Annex VII, Part 4, Paragraph 31 requires institutions to<br />
prove that all models used (including external models) have good<br />
predictive power, that the data used to build the model is<br />
representative of the actual portfolio of the institution, and that a<br />
regular cycle of model validation is in place. The burden is on the<br />
institution to satisfy competent authorities that it complies with these<br />
requirements. In other words, supervisors will not validate external<br />
vendors.<br />
281. Under the IRB approach, institutions can use statistical models in the<br />
rating process and/or to estimate the risk parameters required for<br />
the approach. Although it should be emphasised that the rating<br />
process in total should be an internal rating process, it is not<br />
necessary that all parts of the process be developed internally. Most<br />
institutions use externally developed statistical models to some<br />
extent in their rating process.<br />
282. In the context of these guidelines, an external vendor model is a<br />
model or parts of a model used by an institution and developed by<br />
an independent external third party that uses certain inputs to assign<br />
exposures to certain rating grades or to estimate certain risk<br />
parameters.<br />
283. In addition to the general requirements mentioned above, the<br />
transparency of the vendor model and of its linkage to the internal<br />
information used in the rating process will be examined closely by<br />
supervisors.<br />
Transparency of the vendor model<br />
284. To fulfil the CRD’s requirements regarding internal governance<br />
(Annex VII, Part 4, Paragraphs 123 to 126) and the requirements<br />
regarding the responsibilities of the Credit Risk control unit<br />
(Paragraphs 127 to 129) and the Internal Audit unit (Paragraphs<br />
130) for external vendor models, the institution has to prove that it<br />
understands the external model in all its aspects. The supervisor’s<br />
assessment of the institution’s use of external models will therefore<br />
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