CP10 (Full Document) - European Banking Authority

characteristics should approximate those of the corresponding
institution’s current portfolio.
· Material observed differences in the key characteristics used for
estimation are relevant information in the sense of Annex VII,
Part 4, Paragraph 49, and should be taken into account in
estimations by making appropriate adjustments. If adjustments
are difficult to quantify, the institution should consider the use of
other data sets.
· Statistical tools may be used to quantify and ensure the evidence.
Data used for developing models for exposure assignment or risk
parameter estimation (representativeness)
313. The representativeness requirement of Annex VII, Part 4, Paragraph
31(c) applies both to models and other mechanical methods used to
assign exposures to grades or pools, and to statistical default
prediction models generating default­probability estimates for
individual obligors (see Annex VII, Part 4, Paragraph 65). The
interpretation of ‘representative’ includes the following points (points
1, 3 and 4 are also valid for the estimation of risk parameters):
· Representativeness in the sense of Paragraph 31(c) should be
interpreted similarly, regardless of the source of the data:
internal, external and pooled data sets, or the combination of
those.
· Representativeness for the assignment of obligors does not
require that the proportion of defaulted and non­defaulted
exposures in the data set be equal to the proportion of defaulted
and non­defaulted exposures in the institution’s respective
portfolio.
· For analysing the representativeness of the sample with respect
to the population of the institution, all key characteristics
(quantitative and qualitative obligor and facility characteristics)
that could relate to default (for PD estimation), loss (for LGD
estimation), or additional drawings (for CF estimation) should be
taken into account. The analysis should be based on these
characteristics or on a mapping from one set of characteristics to
the other. For instance, the analysis could include considering the
distribution of the population according to the key characteristics
and the level and range of these key characteristics. Material
observed differences in the key characteristics should be avoided,
for example by using another sample.
· Where applicable, the use of statistical methodologies (such as
cluster analysis or related techniques) to demonstrate
representativeness should be recommended.
· The CRD does not contain requirements on the definitions of
default and loss used in building the model for assignments of
obligors or exposures to grades or pools. Institutions are allowed
to use their own definitions provided they document them and
apply them consistently, and as long as the CRD’s requirement
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