CP10 (Full Document) - European Banking Authority

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institution will first need to assess the general appropriateness of each of its rating systems. This assessment will cover at least: o Verification that each rating system is characterised by an appropriate level of objectivity, accuracy, stability and conservatism. · Objectivity requires the adoption of policies and standards that ensure that ratings and estimates are applied consistently to borrowers and facilities with similar characteristics and posing similar levels of risk. Judgement is a necessary part of any overall rating system. It plays an important role in the development of the system and in the assignment of individual ratings and estimates, including overrides. However, institutions must be able to verify how the use of judgement is managed in order to achieve consistent outcomes. (For the purposes of comparing outcomes against expected performance, institutions should be able to identify how their estimates have been adjusted from the most likely outcome.) · Accuracy requires the adoption of policies and standards relating to the expected performance of the rating system (outcomes versus predictions) and to the integrity of inputs into the rating system and their conversion into outputs. · Stability requires the adoption of policies and standards that ensure that ratings and estimates are broadly unchanged when the underlying risk has not changed. This should not preclude changes that are intrinsic to the rating philosophy of the system. · Conservatism requires the adoption of polices and standards that identify the sources and range of uncertainty in ratings and estimates, and the degree of conservatism. In particular, the policies should identify where and explain how the institution applies conservatism in accordance with the relevant requirements of the CRD. o The appropriateness of the philosophy of each rating system · The philosophy of a rating system can be characterised by two components: the philosophy underlying the grade or pool assignment (i.e.: how institutions assign exposures, obligors or facilities to ’risk buckets’ (according to appropriate risk drivers) and the method Page 76 of 123
used to quantify the risk parameters associated with each grade or pool. · The CRD does not prescribe the philosophy that must underlie the grade or pool assignment in a rating system. Each philosophy results in a specific dynamics of ratings. The philosophy underlying the grade or pool assignment could be characterised by the extent to which a change in economic conditions is expected to result in a net migration of a large number of exposures, borrowers or facilities to other grades or pools (if the institution were to take no compensating policy actions), as opposed to migration of some exposures, borrowers or facilities to other grades or pools due only to their individual characteristics while leaving the number of exposures, borrowers or facilities in each grades or pools substantially unchanged, or a hybrid between these two extremes. 326. In order to assess the appropriateness of the philosophy of a rating system, the institution has to at least: · Fully understand the philosophy underlying the grade or pool assignment, and specifically the risk drivers, and whether they create homogeneous buckets with respect to the targeted estimator. (An example for the PD dimension is whether the buckets are homogeneous with respect to the likelihood that each obligor in each risk bucket will default over the next year given all currentlyavailable information, including obligor and economic information; or, alternatively, with respect to the likelihood that each obligor in each risk bucket will default over the next year given all available information and hypothetical stressscenario economic conditions.) · Assess whether the method used to quantify the risk parameter is adequate for the philosophy underlying the grade or pool assignment. · Fully understand the characteristics, including the dynamics, of its ratings and of its risk parameter estimates. · Assess the adequacy of the resulting characteristics, including the dynamics, of the ratings and risk parameter estimates with regard to their different uses. · Fully understand the impact of the characteristics, including the dynamics, of the ratings and risk parameters estimates on the dynamics and volatility of capital requirements. 327. For example, the institution should at least adopt and document policies which explain the philosophy of each rating system and how Page 77 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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efficient running of the process, u
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and/or 105 of the CRD, subject to t
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58. Institutions intending to move
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translated, supervisors will organi
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76. The issues that supervisors are
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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 and 64: investigating the potential drivers
Page 65 and 66: advisable in some circumstances not
Page 67 and 68: terms) the proof of consistency wit
Page 69 and 70: 302. The information used in credit
Page 71 and 72: exposures to obligors or facilities
Page 73 and 74: Pooled data sets for good predictiv
Page 75: inputs to the IRB approach. Supervi
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
Page 85 and 86: model, and the internal use of the
Page 87 and 88: systems” (Annex VII, Part 4, Para
Page 89 and 90: · Examining reports from Internal
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
Page 97 and 98: subsidiary, or by different subsidi
Page 99 and 100: way of a formal notification). The
Page 101 and 102: · The rollout plan should have a
Page 103 and 104: Principles and examples 1. The purp
Page 105 and 106: etween systems, recording of data t
Page 107 and 108: · The definition of an appropriate
Page 109 and 110: incorporate forwardlooking elemen
Page 111 and 112: · Approving proactive risk managem
Page 113 and 114: frequency and format of the interna
Page 115 and 116: · Development of internal processe
Page 117 and 118: · Understanding the extent and nat
Page 119 and 120: ‣ If not, inform the other superv
Page 121 and 122: the decision. ‣ Agree on the proc
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