CP10 (Full Document) - European Banking Authority

conservatism). Certain conditions also apply to their validation.
Some institutions have raised concerns that they may not be
permitted to apply IRB approaches to portfolios with a low number of
defaults due to the lack of sufficient default or loss data to satisfy the
CRD requirements for validation.
346. Low­default portfolios are portfolios with few or no defaults
observed. Low­default portfolios can arise under different
circumstances, and can be categorized as follows:
· Long­term, due to high­quality borrowers (e.g., institutions) or a
small number of borrowers (e.g., sovereigns), versus short­term
(e.g., new entrants into a market); or
· Systemic (data unavailable for all institutions), versus institutionspecific
(data unavailable for the institution in question, perhaps
due to insufficient effort to enhance its database with suitable
external data).
347. The following principles are aimed at systemic low­default portfolios,
and do not generally apply to institution­specific low­default
portfolios.
348. Exposures in low­default Portfolios should not necessarily be
excluded from the IRB approach simply because of the absence of
sufficient data to validate PD, LGD and CF estimates on a statistical
basis. Such exposures may be included if institutions can
demonstrate that the methods and techniques applied to estimate
and validate PD, LGD and CF constitute a sound and effective riskmanagement
process and are employed in a consistent way.
Institutions will be required to use appropriate conservatism in risk
parameter estimation.
349. The institution’s process for estimating PD, LGD and CF in Lowdefault
Portfolios should be supported by appropriate methodologies.
Even in the absence of defaults, additional information (rating,
prices, etc.) might be available that can be used in the estimation
process. Wherever possible, institutions should take such additional
information into account in their estimation process. The validation
process for low­default portfolios should not be completely different
from the validation process for non­low­default portfolios, and
institutions should ensure compliance with the minimum
requirements laid down in applicable regulations, in particular
regarding adequate margins of conservatism.
350. Institutions should pay particular attention to implementation and
use, and to ensuring that control and technology environments and
internal validation procedures are appropriate.
351. Institutions should reinforce qualitative validation of low­default
portfolios, relative to non­low­default portfolios. The design of rating
models, the quality of the data used in developing and deploying the
Page 84 of 123