CP10 (Full Document) - European Banking Authority

Pooled data sets
for good predictive power (Annex VII, Part 4, Paragraph 31 (a)) is
fulfilled. The institution should ensure, however, that deviations
from the definitions provided in the CRD are not too great and
that the definition of default used results in a ranking of obligors
or exposures similar to that which would result from the CRD’s
definition.
314. Annex VII, Part 4, Paragraph 57(b) of the CRD requires that “the
pool shall be representative for the portfolio for which the pooled
data is used.” The interpretation of ‘representative’ in the context of
data pools includes the following points:
· Representativeness should be demonstrated according to
plausible criteria that have been set in advance in a general
policy.
· These criteria could include the comparability of populations of
exposures in the relevant parts of the pool.
· In the case of pooled data, the default definition used by an
institution for any part of the pool should be similar to the default
definition used for that part by the other institutions in the pool.
Any underestimation of risk that might result from applying
similar default definitions must be avoided. Institutions should
particularly avoid curtailing their use of ‘unlikeliness to pay’
indicators in order to achieve this similarity in default definitions.
· Where applicable, the use of appropriate statistical methods to
demonstrate representativeness should be recommended.
Use of data histories
315. Annex VII, Part 4, Paragraph 50 requires institutions to demonstrate that
their estimates of the risk parameters are representative of long­run
experience. Representativeness, in the context of Paragraph 50, means
that the estimates based a future time horizon of one year nevertheless
reflect at least the relevant events experienced by the institution in the
past over a longer time period.
3.4.4. Data sources and definition of default
316. If institutions use external data sets for risk parameter estimation,
they should apply appropriate adjustments to their estimates in
order to achieve broad equivalence to the reference definition in the
CRD. In the case of pooled data, the definition of default used by the
institution for any part of the pool/data set should be similar to the
default definition used for that part by the other institutions in the
pool, as required by Annex VII, Part 4, Paragraph 57(a).
317. Special considerations for default definitions of pooled data sets: for
data sets collected from the same market, the similarity of the
definition of default could be checked by examining the wording of
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