The European Banking Authority (EBA) has launched a consultation on its supervisory handbook for the validation of internal ratings-based systems.
According to the EBA, the handbook clarifies the role of the validation function as part of corporate governance, in particular in terms of scope of work and interaction with the credit risk control unit. The consultation is running until 28 October 2022.
The EBA said, “This handbook provides some general guidance on the expectations relative to the validation function, as already laid out in Article 185 of the Capital Requirements Regulation (CRR). It builds on the EBA regulatory technical standards (RTS) and guidelines which are part of the ‘IRB repair roadmap’, and provides a detailed description of the areas which the validation function is expected to assess.”
The authority said that in practice, the handbook does not present any specific methodology to be used by the validation function. Instead, the handbook specifies which elements of institutions’ rating systems are expected to be assessed by the validation function.
The EBA added, “In addition, the handbook provides a set of expectations and good practices on the work of the validation function depending on its position in the model cycle (i.e. first or subsequent validation), as well as some additional guidance for the validation of rating systems when using external data, when outsourcing some validation tasks, as well as in a situation of data scarcity.”
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