CP10 (Full Document) - European Banking Authority

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· The results of stress tests; · An estimate of regulatory capital requirements and economic capital; and · The portfolio’s migration across rating grades. 374. The frequency of reporting as well as its scope should be set according to the nature of the recipient and the level of risk. The level of risk could depend, for example, on the ratings or the size of exposures. 375. In addition to the reporting mentioned above, the Credit Risk Control Unit should address specific reports to the management body (management function) relating to the rating system review process. It is the responsibility of the CRCU to provide coherent reporting that is clearly related to target variables. 3.6.2. Independent Credit Risk Control Unit Goal/Scope of activity 376. The main goal of the Credit Risk Control Unit (Annex VII, Part IV, Paragraphs 127 to 129) is to ensure, on a regular basis, that the rating system and all of its components – rating assignments, parameter estimation, data collection, and oversight – are functioning as intended. The Credit Risk Control Unit should perform the following tasks, among others: · Design of the rating system (perform or review); · Ongoing review of the rating criteria and model development; · Verification of the accuracy of all riskrating grades; · Assessment of consistency across industries, portfolios, and geographical regions; · Assessment of model use; · Analysis of the reasons for overrides and exceptions; · Quantification process (perform or review); · Backtesting; · Analysis of actual and predicted ratings transitions; and · Benchmarking against thirdparty data sources. 377. The results of the CRCU’s review should be reported to the management body (both supervisory and management functions) at least twice annually. Proportionality 378. Establishing a specific unit responsible for developing and designing the rating system, and a separate unit that contains only the CRC function, could be burdensome, especially for smaller and less sophisticated institutions. Implementing the minimum requirements of the CRD could, in practice, impose some redundancies from an Page 90 of 123
organisational point of view (e.g., a Credit Risk Control Unit composed of only a handful of officers). 379. In these cases, national supervisors can decide to make specific adjustments to these guidelines, taking into account the nature, size, and level of complexity of the business performed by the institutions applying for the use of the IRB approach. 380. However, such adjustments must not undermine the principle of independence of the CRC function or the overall soundness of the control environment. For example, in some small institutions, the Credit Risk Control function is also responsible for the rating assignment process for specific obligors. This may be due to staff scarcity, or because staff in the CRC function who are directly involved in model building and review are more skilled in the assignment of ratings, especially to counterparties whose creditworthiness is difficult to assess (e.g., Specialised Lending, large and complex groups). 381. In this case, a lack of objectivity may arise because the ‘model builder’ may have an excessive degree of confidence in the model output, and may become more tolerant towards potential failures or biases. Therefore, depending on the circumstances, the coexistence of the two tasks may be regarded either as an exceptional (permanent) or a transitional solution, in the latter case to be overcome as soon as possible. The coexistence should be made transparent in any case. Location of CRC function within the organisational structure 382. Any attempt to specify where in the organisational structure of an institution the CRC function should be located could be to some extent counterproductive, for the following reasons: · The activities of the CRC function span multiple areas or business units. · Institutions will choose a structure that fits their management and oversight frameworks. 383. A minimum requirement, however, could be to make the CRC function depend directly on the management body (management function), wherever the unit is located within the organisation. Part of the duties of Internal Audit should be to review whether the location of the CRC function could reduce its independence. 384. The CRC function must always have high standing within the organisation, and should be staffed by individuals possessing the requisite stature, skills, and experience. Independence of the CRC function from the functions responsible for originating or renewing exposures 385. Lack of independence of the Credit Risk Control function and pressures from relationship managers could seriously undermine the Page 91 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
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should start with inputs, and those
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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
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Page 73 and 74: Pooled data sets for good predictiv
Page 75 and 76: inputs to the IRB approach. Supervi
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 87 and 88: systems” (Annex VII, Part 4, Para
Page 89: · Examining reports from Internal
Page 93 and 94: conclusions are wellfounded. Inte
Page 95 and 96: 401. The role played by the CRC fun
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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
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Page 119 and 120: ‣ If not, inform the other superv
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