CP10 (Full Document) - European Banking Authority

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357. Annex VII, Part 4, Paragraphs 123 to 126 use the terms ‘board of directors’ and ‘senior management.’ The use of these terms is not intended to advocate any particular board structure, recognising that there are significant differences in legislative and regulatory frameworks across EU countries regarding the structure and functions of the management body referred to in the CRD. 358. Within an institution there are two distinct functions that must be fulfilled: supervision and management. Roughly half of all EU member states have a onetier board structure in which both functions are performed within the board of directors. The supervisory function is performed by the nonexecutive directors and the management function is performed by the executive directors. The other half of EU members states have a twotier board structure. In a majority of these member states, the supervisory function is performed by the board of directors and the management function is performed by the managing director together with some key executives. (Both the managing director and the key executives are appointed by the board of directors.) This executive group, including the managing director, is usually called the ‘senior management.’ 359. When the term ‘management body’ is used in this paper, it is meant to encompass both onetier and twotier board structures. The guidelines always make clear which function (supervisory, management, or both) is being referred to. 360. Annex VII, Part 4, Paragraph 127 refers to the ‘Credit Risk Control Unit’ (CRCU). It is useful at this point to distinguish between the organisational part and the functional part (the Credit Risk Control function) of this term. As part of the internal control function, the Credit Risk Control function should be independent from the business lines it monitors and controls. It is designed and implemented to address the risks that the institution identifies through the risk assessment process. 361. Large, complex, and sophisticated institutions should establish a risk control function to monitor each of the material risks (within material business lines) to which the institution is exposed. The risk control function should report to the management body (management function) and other relevant staff. 362. Although in most cases the organisational part of the CRCU and the CRC function would be identical (and consequently the CRCU would encompass only people responsible for fulfilling the Credit Risk Control function), the CRCU could, as an organisational unit, encompass both people responsible for the design of the model and people responsible for the independent review of the model. 363. As far as the design of the rating models is concerned, the CRD affirms that the CRCU “shall be responsible for the design or selection, implementation, oversight and performance of the rating Page 86 of 123
systems” (Annex VII, Part 4, Paragraph 127). It thus appears that the two broad functions of model review and model development and selection could be performed by the same unit. A rationale for this structure could be found in the skills and experience of people who design or select models, which sometimes make them the only ones able to review and validate models. Furthermore, the separation of the two units could be burdensome, especially in smaller institutions. 364. The coexistence of both functions in the same unit should not be seen as an obstacle; any potential for lack of objectivity should be offset with rigorous controls, administered by the Internal Audit, to prevent bias from affecting the rating process. 3.6.1. Role of the management body Hierarchy of responsibility/level of decision 365. Sound internal governance requires that the decisionmaking process be clearly stated within each institution, in terms of hierarchy and level of responsibility. · The management body (both supervisory and management functions), as the body responsible for policymaking, guidance, and monitoring of the company’s strategy, should be responsible for approving all material aspects of the overall Risk Control System. · The management body (management function) should ensure that all components of the IRB system, including controls, are functioning as intended. · The credit risk control function is ultimately responsible for proper functioning of the rating systems; it submits rating systems to the management body (management function) for approval; · The Internal Audit should provide an assessment of the overall adequacy of the internal control system and of the credit risk control function. Management body and Senior Management 366. The management body, (both supervisory and management functions) should be responsible for approving all material aspects of the overall Risk Control System, including: · Risk management strategies and policies regarding the internal rating system (including all material aspects of the rating assignment and risk parameter estimation processes); · The organisational structure of the control functions; · Specifying acceptable risk (using IRB results to define the credit risk profile of the institution). Page 87 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
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· A new approval process shall not
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· Institutions may not be ready to
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2. Asking institutions to notify su
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116. ‘Immaterial’ should refer
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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
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Page 77 and 78: used to quantify the risk parameter
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
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Page 89 and 90: · Examining reports from Internal
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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
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Page 109 and 110: incorporate forwardlooking elemen
Page 111 and 112: · Approving proactive risk managem
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Page 119 and 120: ‣ If not, inform the other superv
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