CP10 (Full Document) - European Banking Authority

the definition and the internal use of the definition, or by looking at
the practical usage of the definition for that market.
318. For cross border­data sets, the broad scope of the CRD’s definition of
default could result in country­specific definitions. Two cases should
be distinguished here (see also section 3.3.2.1. on the definition of
default):
· Due to the strong link of the CRD’s definition of default to
accounting and bankruptcy laws, the same wording of the
definition of default could have different meanings or be
interpreted differently across jurisdictions. An example of this is
the meaning of ‘non­accrued status.’
· An institution might identify additional indicators of unlikeliness to
pay that are typical for a given country. In this case, the
definitions of default will not have the same wording, but the
meaning of default could be the same.
319. In either case, the institution should demonstrate that the definitions
of default used by the institutions that participate in the pool are
similar.
3.5. Quantitative and qualitative validation and its assessment
3.5.1. High level principles on validation
320. The Committee of European Banking Supervisors endorses the
definition of validation and the six general principles for validation
described in the Basel Committee’s Newsletter of January 2005
(“Update on the work of the Accord Implementation Group related to
validation under the Basel II Framework”). In this section, CEBS
provides additional guidance on validation. This additional guidance
is shown in italics in order to distinguish it from the rest of this
section, which is drawn directly from the general principles in the
Basel newsletter.
321. One of the greatest challenges posed by the revised capital
framework, for both institutions and supervisors, is validating the
systems used to generate the parameters that serve as inputs to the
internal ratings­based (IRB) approach to credit risk. The IRB
framework requires institutions to assess the ability of a borrower to
perform in adverse economic conditions. Thus, when considering the
appropriateness of any rating system as the basis for determining
capital, there will always be a need to ensure objectivity, accuracy,
stability, and an appropriate level of conservatism.
322. Internal ratings and default and loss estimates must play an
essential role in the credit approval, risk management, internal
capital allocation, and corporate governance functions of institutions
using the IRB approach. The CRD recognises that the management
of institutions continues to bear responsibility for validating the
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