credit model validation-evolving practice and challenges on the way

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1、CreditModelValidation–EvolvingPracticeandChallengesontheWayPRMIA,Athens2006Dr.LeifBoegeleinGlobalFinancialServicesRiskManagementLeif.Boegelein@ch.ey.com06.11.2006Agenda1.Motivation&Objectives2.The“LowDefaultPortfolio”Challenge3.PDModelValidation•DiscriminatoryPower•ModelC

2、alibration•CyclicalityAdjustment4.EAD/LGDModelValidation5.Summary2Ernst&Young2006DefiningCreditModelValidationPreviousIndustryPerspective•AsecondaryaspectofModelBuilding•Innormaltimesaconcernmainlyformodellers•Atechnicalreviewofmodels,typicallytriggeredbycrises•Performedw

3、ithintheModelDeveloperunits,adhocproceduresandmethodologiesBaselIIRegulatoryPerspective•AkeyrequirementforIRBcompliance•Akeyelementofboardandseniormanagementreports•Awelldefined,actionableprocessaroundongoingreportingonmodelqualitywithclearlydefinedresponsibilities,metric

4、s,thresholdsforacceptablequality.•Independentofmodeldevelopment•Theresponsibilityofbanks,notsupervisors3Ernst&Young2006DefiningCreditModelValidationRelevantCreditRiskModels•IRBrevisedframeworkcreditriskmodels:counterpartyrating(PD),collateralrecovery(LGD)andexposure(EAD).

5、Simplified:“Non-TradingBook”models•CreditCounterpartyRisk(CCR)exposuremodelsforOTCderivativesandSFTs.Simplified:“TradingBook”models.IRBNon-TradingBookCCR(OTCDerivatives&SFTs)ObligorRatingObligorRatingMethodologyPDMethodologyPDRecoveryRiskLGDIRBRWRecoveryRiskLGDEADModelEAD

6、CCRExposureEAD4Ernst&Young2006Motivation:RegulatoryComplianceF-IRB/A-IRBRegulatoryRequirementson“ValidationofInternalEstimates”(BII§§500-505):UKWaiverApplicationCP189,CP06/03“BanksmusthavearobustsysteminplacetovalidatetheDiscriminatoryPoweraccuracyandconsistencyofratingsy

7、stems,processes,andtheestimationofallrelevantriskcomponents…”[BaselII,§500]Calibration“…abankmustdemonstratetoitssupervisorthattheinternalActionplanvalidationprocessenablesittoassesstheperformanceofinternalratingandriskestimationsystemsconsistentlyandmeaningfully.”[BaselI

8、I,§500]ContinuousImprovement“BanksmustregularlycomparerealiseddefaultrateswithestimatedPDsforeac