CP10 (Full Document) - European Banking Authority

model, and the internal use of the rating system should be key areas
of the validation process for low­default portfolios. A high level of
compliance with the use test is an important indicator of an
institution’s confidence in its estimates, and will therefore be viewed
as a necessary part of meeting the minimum requirements.
However, meeting the use test is not in itself a sufficient condition,
and must in any event be treated with particular caution for lowdefault
portfolios, given the inherent difficulty in proving the
accuracy of the estimates of PD, LGD and CF. As is the case with
non­low­default portfolios, standardised procedures should be
applied for assigning ratings in low­default portfolios. These
procedures can be based on expert judgement and/or on external
data. In any case, it is necessary to monitor the quality, objectivity
and credibility of the data sources, and to strengthen the
transparency and completeness of documentation.
Quantitative Validation:
352. Limitations in the dataset should not exempt institutions from
performing a quantitative validation on low­default portfolios.
Adequate and consistent methods should be used to ensure a sound
and effective assessment and measurement of risk. The criteria to be
reviewed in quantitative validation should include at least calibration,
discriminative power, and stability.
353. The approach for calibration is likely to be based more on expert
judgement, utilising the extensive internal and/or external
experience with the particular type of business.
354. Institutions could use a variety of quantitative and qualitative
analyses to provide confidence in, and an indication of, the
discriminative power of the models. Depending on the amount of
data, different techniques can be used:
· Internal benchmarking;
· Comparison with other ratings and models;
· Comparison with other external information;
3.6. Internal governance
355. Annex VII, Part 4, Paragraphs 123 to 130 set minimum requirements
regarding corporate governance and oversight. This section of the
guidelines elaborates on those minimum requirements.
356. The aim of this section is not to lay down a ‘one­size­fits­all’
approach to assessing an institution’s organisational structure,
internal governance, and internal control systems. Supervisors
should tailor their assessment to the characteristics of respective
institutions, taking into account their size and the complexity and
nature of their business (‘proportionality principle’).
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