CA-5.2.5

In general, a corporate exposure is defined as a debt obligation of a corporation, partnership, or proprietorship. Banks are permitted to distinguish separately exposures to small- and medium-sized entities (SME), as defined in paragraph CA-5.3.4.

CA-5.2.6

Within the corporate asset class, five sub-classes of specialised lending (SL) are identified. Such lending possesses all the following characteristics, either in legal form or economic substance:

CA-5.2.7

The five sub-classes of specialised lending are project finance, object finance, commodities finance, income-producing real estate, and high-volatility commercial real estate. Each of these sub-classes is defined below.

Project Finance

Object Finance

Commodities Finance

Income-producing Real Estate

High-volatility Commercial Real Estate

CA-5.2.16

This asset class covers all exposures to counterparties treated as sovereigns under the standardised approach. This includes sovereigns (and their central banks), certain PSEs identified as sovereigns in the standardised approach, MDBs that are given a 0% risk weight under the standardised approach, and the entities referred to in paragraph CA-3.2.3.

CA-5.2.17

This asset class covers exposures to banks and those investment firms outlined in paragraph CA-3.2.13. Bank exposures also include claims on domestic PSEs that are treated like claims on banks under the standardised approach, and MDBs that are not assigned a 0% risk weight under the standardised approach.

CA-5.2.18

An exposure is categorised as a retail exposure if it meets all of the following criteria:

Nature of Borrower or Low Value of Individual Exposures

Large Number of Exposures

CA-5.2.21

All of the following criteria must be satisfied for a sub-portfolio to be treated as a qualifying revolving retail exposure (QRRE). These criteria must be applied at a sub-portfolio level consistent with the bank's segmentation of its retail activities generally. Segmentation at the national or country level (or below) should be the general rule:

CA-5.2.22

In general, equity exposures are defined on the basis of the economic substance of the instrument. They include both direct and indirect ownership interests,³¹ whether voting or non-voting, in the assets and income of a commercial enterprise or of a financial institution that is not consolidated or deducted pursuant to Prudential Consolidation and Deduction Requirements Module. An instrument is considered to be an equity exposure if it meets all of the following requirements:

³¹ Indirect equity interests include holdings of derivative instruments tied to equity interests, and holdings in corporations, partnerships, limited liability companies or other types of enterprises that issue ownership interests and are engaged principally in the business of investing in equity instruments.

CA-5.2.23

Additionally any of the following instruments must be categorised as an equity exposure:

³²For certain obligations that require or permit settlement by issuance of a variable number of the issuer's equity shares, the change in the monetary value of the obligation is equal to the change in the fair value of a fixed number of equity shares multiplied by a specified factor. Those obligations meet the conditions of this bullet if both the factor and the referenced number of shares are fixed. For example, an issuer may be required to settle an obligation by issuing shares with a value equal to three times the appreciation in the fair value of 1,000 equity shares. That obligation is considered to be the same as an obligation that requires settlement by issuance of shares equal to the appreciation in the fair value of 3,000 equity shares.

CA-5.2.24

Debt obligations and other securities, partnerships, derivatives or other vehicles structured with the intent of conveying the economic substance of equity ownership are considered an equity holding.³³ This includes liabilities from which the return is linked to that of equities.³⁴ Conversely, equity investments that are structured with the intent of conveying the economic substance of debt holdings or securitisation exposures would not be considered an equity holding.

³³Equities that are recorded as a loan but arise from a debt/equity swap made as part of the orderly realisation or restructuring of the debt are included in the definition of equity holdings. However, these instruments may not attract a lower capital charge than would apply if the holdings remained in the debt portfolio.

³⁴Such liabilities are not required to be included where they are directly hedged by an equity holding, such that the net position does not involve material risk.

CA-5.2.25

The CBB may, on a case by case basis, re-characterise debt holdings as equities for regulatory purposes or otherwise ensure the proper treatment of holdings.

CA-5.2.26

Eligible purchased receivables are divided into retail and corporate receivables as defined below.

Retail Receivables

Corporate Receivables

CA-5.2.31

For corporate, sovereign and bank exposures only the foundation approach is allowed under which banks must provide their own estimates of PD associated with each of their borrower grades, but must use CBB's estimates for the other relevant risk components. The other risk components are LGD, EAD and M.³⁵

³⁵ As noted in section CA-5.3.45, CBB may require/allow banks using the foundation approach to calculate M using the definition provided in section CA-5.3.46 to CA-5.3.50.

CA-5.2.32

There is an exception to this general rule for the five sub-classes of assets identified as SL.

The SL Categories: PF, OF, CF, IPRE, and HVCRE

CA-5.2.35

For retail exposures, banks must provide their own estimates of PD, LGD and EAD. There is no distinction between a foundation and advanced approach for this asset class.

CA-5.2.36

There are two broad approaches to calculate risk-weighted assets for equity exposures not held in the trading book: a market-based approach and a PD/LGD approach. These are set out in full in paragraphs CA-5.5.1 to CA-5.5.23.

CA-5.2.37

The treatment potentially straddles two asset classes. For eligible corporate receivables, only the foundation approach is available subject to certain operational requirements being met. For eligible retail receivables, as with the retail asset class, there is no distinction between a foundation and advanced approach.

CA-5.2.45

Banks adopting the foundation IRB (advanced IRB for retail class) approach are required to calculate their capital requirement using these approaches, as well as the capital adequacy regulations issued by CBB dated July 2004 for the time period specified in section CA-A.4. The transition period for adoption of IRB will begin from the publication of this Module. Parallel calculation for banks adopting the foundation IRB approach to credit risk will start in the year beginning year-end 2007.

CA-5.2.46

The transition period starts on the date of implementation of this Module and will last for 3 years from that date. During the transition period, the following minimum requirements can be relaxed:

CA-5.2.47

Under these transitional arrangements for IRB, banks must have a minimum of two years of data at the implementation of this Module. This requirement will increase by one year for each of three years of transition.

CA-5.2.48

Owing to the potential for very long-run cycles in house prices which short-term data may not adequately capture, during this transition period, LGDs for retail exposures secured by residential properties cannot be set below 10% for any sub-segment of exposures to which the formula in paragraph CA-5.4.3 is applied.³⁶ During the transition period the CBB will review the potential need for continuation of this floor.

³⁶ The 10% LGD floor shall not apply, however, to sub-segments that are subject to/benefit from sovereign guarantees. Further, the existence of the floor does not imply any waiver of the requirements of LGD estimation as laid out in the minimum requirements starting with section CA-5.8.79.

CA-5.2.49

For a maximum of ten years, CBB may, on a case by case basis, exempt from the IRB treatment particular equity investments held at the time of the publication of this Module. This exemption period will begin from the publication of this Module. The exempted position is measured as the number of shares as of that date and any additional arising directly as a result of owning those holdings, as long as they do not increase the proportional share of ownership in a portfolio company.

CA-5.2.50

If an acquisition increases the proportional share of ownership in a specific holding (e.g. due to a change of ownership initiated by the investing company subsequent to the publication of this Module) the exceeding part of the holding is not subject to the exemption. Nor will the exemption apply to holdings that were originally subject to the exemption, but have been sold and then bought back.

CA-5.2.51

Equity holdings covered by these transitional provisions will be subject to the capital requirements of the standardised approach.

CA-5.3.2

The derivation of risk-weighted assets is dependent on estimates of the PD, LGD, EAD and, in some cases, effective maturity (M), for a given exposure. Paragraphs CA-5.3.45 to CA-5.3.50 discuss the circumstances in which the maturity adjustment applies.

CA-5.3.3

Throughout this section, PD and LGD are measured as decimals, and EAD is measured as currency (e.g. euros), except where explicitly noted otherwise. For exposures not in default, the formula for calculating risk-weighted assets is:³⁷, ³⁸

Correlation (R) = 0.12 × (1 - EXP(-50 × PD)) / (1 - EXP(-50)) + 0.24 × [1 - (1 - EXP(-50 × PD)) / (1 - EXP(-50))]

Maturity adjustment (b) = (0.11852 - 0.05478 × ln(PD))^2

Capital requirement³⁹ (K) = [LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD] x (1 - 1.5 x b)^-1 × (1 + (M - 2.5) × b)

Risk-weighted assets (RWA) = K × 12.5 × EAD

The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.

Illustrative risk weights are shown in Appendix CA-6.

³⁷Ln denotes the natural logarithm.

³⁸N(x) denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x). G(z) denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value of x such that N(x) = z). The normal cumulative distribution function and the inverse of the normal cumulative distribution function are, for example, available in Excel as the functions NORMSDIST and NORMSINV.

³⁹If this calculation results in a negative capital charge for any individual sovereign exposure, banks must apply a zero capital charge for that exposure.

CA-5.3.4

Under the IRB approach for corporate credits, banks will be permitted to separately distinguish exposures to SME borrowers (defined as corporate exposures, being an unlisted or unincorporated enterprise where the reported annual sales for the consolidated group of which the firm is a part is less than BD 2 million) from those to large firms. A firm-size adjustment (i.e. 0.04 x (1 - (S - 0.2)/1.8)) is made to the corporate risk weight formula for exposures to SME borrowers. S is expressed as total annual sales in millions of BD with values of S falling in the range of equal to or less than BD 2 million or greater than or equal to BD 0.2 million. Reported sales of less than 0.2 million BD will be treated as if they were equivalent to 0.2 million BD for the purposes of the firm-size adjustment for SME borrowers.

Correlation (R) = 0.12 × (1 - EXP(-50 × PD)) / (1 - EXP(-50)) + 0.24 × [1 - (1 - EXP(-50 × PD)) / (1 - EXP(-50))] - 0.04 × (1 - (S-0.2) / 1.8)

CA-5.3.5

Banks are allowed, as a failsafe, to substitute total assets of the consolidated group for total sales in calculating the SME threshold and the firm-size adjustment. However, total assets should be used only when total sales are not a meaningful indicator of firm size. The criteria for definition of SME will be assessed by CBB on a regular basis. The external auditors are required to assess the reasonableness of identification criteria.

Risk Weights for PF, OF, CF, and IPRE

Risk Weights for HVCRE

CA-5.3.12

For hedged exposures to be treated within the scope of the double default framework, capital requirements may be calculated according to paragraphs CA-5.3.13 to CA-5.3.16.

CA-5.3.13

The capital requirement for a hedged exposure subject to the double default treatment (K_DD) is calculated by multiplying K₀ as defined below by a multiplier depending on the PD of the protection provider (PD_g):

K_DD = K₀ . ( 0.15 + 160 . PD_g)

CA-5.3.14

K₀ is calculated in the same way as a capital requirement for an unhedged corporate exposure (as defined in paragraphs CA-5.3.3 and CA-5.3.4), but using different parameters for LGD and the maturity adjustment.

CA-5.3.15

PDo and PDg are the probabilities of default of the obligor and guarantor, respectively, both subject to the PD floor set out in paragraph CA-5.3.17. The correlation Pos is calculated according to the formula for correlation (R) in paragraph CA-5.3.3 (or, if applicable, paragraph CA-5.3.4), with PD being equal to PDo, and LGDg is the LGD of a comparable direct exposure to the guarantor (i.e. consistent with paragraph CA-5.3.29, the LGD associated with an unhedged facility to the guarantor or the unhedged facility to the obligor, depending upon whether in the event both the guarantor and the obligor default during the life of the hedged transaction available evidence and the structure of the guarantee indicate that the amount recovered would depend on the financial condition of the guarantor or obligor, respectively; in estimating either of these LGDs, a bank may recognise collateral posted exclusively against the exposure or credit protection, respectively, in a manner consistent with paragraphs CA-5.3.31 or CA-5.3.8 and CA-5.8.79 to CA-5.8.83, as applicable). There may be no consideration of double recovery in the LGD estimate. The maturity adjustment coefficient b is calculated according to the formula for maturity adjustment (b) in paragraph CA-5.3.3, with PD being the minimum of PDo and PDg M is the effective maturity of the credit protection, which may under no circumstances be below the one-year floor if the double default framework is to be applied.

CA-5.3.16

The risk-weighted asset amount is calculated in the same way as for unhedged exposures, i.e

RWA_DD = K_DD × 12.5 × EAD_g

CA-5.3.17

For corporate and bank exposures, the PD is the greater of the one-year PD associated with the internal borrower grade to which that exposure is assigned, or 0.03%. For sovereign exposures, the PD is the one-year PD associated with the internal borrower grade to which that exposure is assigned. The PD of borrowers assigned to a default grade(s), consistent with the reference definition of default, is 100%. The minimum requirements for the derivation of the PD estimates associated with each internal borrower grade are outlined in paragraphs CA-5.8.72 to CA-5.8.74.

— Treatment of Unsecured Claims and Non-recognised Collateral

— Collateral under the Foundation Approach

— Methodology for Recognition of Eligible Financial Collateral under the Foundation Approach

— Carve Out from the Comprehensive Approach

— Methodology for Recognition of Eligible IRB Collateral

— Methodology for the Treatment of Pools of Collateral

— Treatment of Certain Repo-style Transactions

— Treatment of Guarantees and Credit Derivatives

— Operational Requirements for Recognition of Double Default

CA-5.3.36

The following sections apply to both on and off-balance sheet positions. All exposures are measured gross of specific provisions or partial write-offs. The EAD on drawn amounts should not be less than the sum of (i) the amount by which a bank's regulatory capital would be reduced if the exposure were written-off fully, and (ii) any specific provisions and partial write-offs. When the difference between the instrument's EAD and the sum of (i) and (ii) is positive, this amount is termed a discount. The calculation of risk-weighted assets is independent of any discounts. Under the limited circumstances described in paragraph CA-5.7.7, discounts may be included in the measurement of total eligible provisions for purposes of the EL-provision calculation set out in section CA-5.7.

Exposure Measurement for On-balance Sheet Items

Exposure Measurement for Off-balance Sheet Items (with the Exception of FX and Interest-rate, Equity, and Commodity-related Derivatives)

Exposure Measurement for Transactions that Expose Banks to Counterparty Credit risk

CA-5.3.45

Effective maturity (M) will be 2.5 years except for repo-style transactions where the effective maturity will be 6 months. However, banks can apply to CBB for approval to measure M for each facility using the definition provided below.

CA-5.3.46

Except as noted in proceeding paragraph, M is defined as the greater of one year and the remaining effective maturity in years as defined below. In all cases, M will be no greater than 5 years:

(a) For an instrument subject to a determined cash flow schedule, effective maturity M is defined as:



where CFt denotes the cash flows (principal, interest payments and fees) contractually payable by the borrower in period t.

CA-5.3.47

The one-year floor does not apply to certain short-term exposures, comprising fully or nearly-fully collateralised⁴⁴ capital market-driven transactions (i.e. OTC derivatives transactions and margin lending) and repo-style transactions (i.e. repos/reverse repos and securities lending/borrowing) with an original maturity of less then one year, where the documentation contains daily remargining clauses. For all eligible transactions the documentation must require daily revaluation, and must include provisions that must allow for the prompt liquidation or setoff of the collateral in the event of default or failure to re-margin. The maturity of such transactions must be calculated as the greater of one-day, and the effective maturity (M, consistent with the definition above).

⁴⁴ The intention is to include both parties of a transaction meeting these conditions where neither of the parties is systematically under-collateralised.

CA-5.3.48

In addition to the transactions considered in the preceding paragraph above, other short-term exposures with an original maturity of less than one year that are not part of a bank's ongoing financing of an obligor are eligible for exemption from the one-year floor. Such transactions include:

CA-5.3.49

For transactions falling within the scope of paragraph CA-5.3.47 subject to a master netting agreement, the weighted average maturity of the transactions should be used when applying the explicit maturity adjustment. A floor equal to the minimum holding period for the transaction type set out in paragraph CA-4.3.11 will apply to the average. Where more than one transaction type is contained in the master netting agreement a floor equal to the highest holding period will apply to the average. Further, the notional amount of each transaction should be used for weighting maturity.

CA-5.3.50

Where there is no explicit adjustment, the effective maturity (M) assigned to all exposures is set at 2.5 years unless otherwise specified in paragraph CA-5.3.45.

Treatment of Maturity Mismatches

CA-5.4.3

For exposures defined in paragraph CA-5.2.18 that are not in default and are secured or partly secured⁴⁵ by residential mortgages, risk weights will be assigned based on the following formula:

Correlation (R) = 0.15

Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD

Risk-weighted assets = K x 12.5 x EAD

The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.

⁴⁵ This means that risk weights for residential mortgages also apply to the unsecured portion of such residential mortgages.

CA-5.4.4

For qualifying revolving retail exposures as defined in paragraph CA-5.2.21 that are not in default, risk weights are defined based on the following formula:

Correlation (R) = 0.04

Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD

Risk-weighted assets = K x 12.5 x EAD

The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.

CA-5.4.5

For all other retail exposures that are not in default, risk weights are assigned based on the following function, which allows correlation to vary with PD:

Correlation (R) = 0.03 × (1 - EXP(-35 × PD)) / (1 - EXP(-35)) + 0.16 × [1 - (1 - EXP(-35 × PD))/(1 - EXP(-35))]

Capital requirement (K) = LGD × N[(1 - R)^-0.5 × G(PD) + (R / (1 - R))^0.5 × G(0.999)] - PD x LGD

Risk-weighted assets = K × 12.5 × EAD

The capital requirement (K) for a defaulted exposure is equal to the greater of zero and the difference between its LGD (described in paragraph CA-5.8.79) and the bank's best estimate of expected loss (described in paragraph CA-5.8.82). The risk-weighted asset amount for the defaulted exposure is the product of K, 12.5, and the EAD.

Illustrative risk weights are shown in Appendix CA-6.

CA-5.4.6

For each identified pool of retail exposures, banks are expected to provide an estimate of the PD and LGD associated with the pool, subject to the minimum requirements as set out in section CA-5.8. Additionally, the PD for retail exposures is the greater of the one- year PD associated with the internal borrower grade to which the pool of retail exposures is assigned or 0.03%.

CA-5.4.7

Banks may reflect the risk-reducing effects of guarantees and credit derivatives, either in support of an individual obligation or a pool of exposures, through an adjustment of either the PD or LGD estimate, subject to the minimum requirements in paragraphs CA-5.8.91 to CA-5.8.100. Whether adjustments are done through PD or LGD, they must be done in a consistent manner for a given guarantee or credit derivative type.

CA-5.4.8

Consistent with the requirements outlined above for corporate, sovereign, and bank exposures, banks must not include the effect of double default in such adjustments. The adjusted risk weight must not be less than that of a comparable direct exposure to the protection provider. Consistent with the standardised approach, banks may choose not to recognise credit protection if doing so would result in a higher capital requirement.

CA-5.4.9

Both on and off-balance sheet retail exposures are measured gross of specific provisions or partial write-offs. The EAD on drawn amounts should not be less than the sum of (i) the amount by which a bank's regulatory capital would be reduced if the exposure were written-off fully, and (ii) any specific provisions and partial write-offs. When the difference between the instrument's EAD and the sum of (i) and (ii) is positive, this amount is termed a discount. The calculation of risk-weighted assets is independent of any discounts. Under the limited circumstances described in paragraph CA-5.7.7, discounts may be included in the measurement of total eligible provisions for purposes of the EL-provision calculation set out in Section CA-5.7.

CA-5.4.10

On-balance sheet netting of loans and deposits of a bank to or from a retail customer will be permitted subject to the same conditions outlined in paragraph CA-4.4.1 of the standardised approach. For retail off-balance sheet items, banks must use their own estimates of CCFs provided the minimum requirements in paragraphs CA-5.8.84 to CA-5.8.87 and CA-5.8.90 are satisfied.

CA-5.4.11

For retail exposures with uncertain future drawdown such as credit cards, banks must take into account their history and/or expectation of additional drawings prior to default in their overall calibration of loss estimates. In particular, where a bank does not reflect conversion factors for undrawn lines in its EAD estimates, it must reflect in its LGD estimates the likelihood of additional drawings prior to default. Conversely, if the bank does not incorporate the possibility of additional drawings in its LGD estimates, it must do so in its EAD estimates.

CA-5.4.12

When only the drawn balances of retail facilities have been securitised, banks must ensure that they continue to hold required capital against their share (i.e. seller's interest) of undrawn balances related to the securitised exposures using the IRB approach to credit risk. This means that for such facilities, banks must reflect the impact of CCFs in their EAD estimates rather than in the LGD estimates. For determining the EAD associated with the seller's interest in the undrawn lines, the undrawn balances of securitised exposures would be allocated between the seller's and investors' interests on a pro rata basis, based on the proportions of the seller's and investors' shares of the securitised drawn balances. The investors' share of undrawn balances related to the securitised exposures is subject to the treatment in paragraph CA-6.4.32.

CA-5.4.13

To the extent that foreign exchange and interest rate commitments exist within a bank's retail portfolio for IRB purposes, banks are not permitted to provide their internal assessments of credit equivalent amounts. Instead, the rules for the standardised approach continue to apply.

CA-5.5.5

Under the market-based approach, institutions are permitted to calculate the minimum capital requirements for their banking book equity holdings using one or both of two separate and distinct methods: a simple risk weight method or an internal models method. The method used should be consistent with the amount and complexity of the institution's equity holdings and commensurate with the overall size and sophistication of the institution. CBB may require the use of either method based on the individual circumstances of a bank.

— Simple Risk Weight Method

Internal Models Method

CA-5.5.12

The minimum requirements and methodology for the PD/LGD approach for equity exposures (including equity of companies that are included in the retail asset class) are the same as those for the IRB foundation approach for corporate exposures subject to the following specifications:

⁴⁶ In practice, if there is both an equity exposure and an IRB credit exposure to the same counterparty, a default on the credit exposure would thus trigger a simultaneous default for regulatory purposes on the equity exposure.

CA-5.5.13

Under the PD/LGD approach, minimum risk weights as set out in section CA-5.5.14 and CA-5.5.15 apply. When the sum of UL and EL associated with the equity exposure results in less capital than would be required from application of one of the minimum risk weights, the minimum risk weights must be used. In other words, the minimum risk weights must be applied, if the risk weights calculated according to the preceding paragraph plus the EL associated with the equity exposure multiplied by 12.5 are smaller than the applicable minimum risk weights.

CA-5.5.14

A minimum risk weight of 100% applies for the following types of equities for as long as the portfolio is managed in the manner outlined below:

CA-5.5.15

For all other equity positions, including net short positions (as defined in section CA-5.5.7), capital charges calculated under the PD/LGD approach may be no less than the capital charges that would be calculated under a simple risk weight method using a 200% risk weight for publicly traded equity holdings and a 300% risk weight for all other equity holdings.

CA-5.5.16

The maximum risk weight for the PD/LGD approach for equity exposures is 1250%. This maximum risk weight can be applied, if risk weights calculated according to section CA-5.5.12 plus the EL associated with the equity exposure multiplied by 12.5 exceed the 1250% risk weight. Alternatively, banks may deduct the entire equity exposure amount, assuming it represents the EL amount, 50% from Tier 1 capital and 50% from Tier 2 capital.

CA-5.5.17

Hedging for PD/LGD equity exposures is, as for corporate exposures, subject to an LGD of 90% on the exposure to the provider of the hedge. For these purposes equity positions will be treated as having a five-year maturity.

CA-5.5.18

Banks are allowed to exclude equity holdings in entities whose debt obligations qualify for a zero risk weight under the standardised approach to credit risk from the IRB approaches to equity (including those publicly sponsored entities where a zero risk weight can be applied).

CA-5.5.19

Equity exposures of a bank can be excluded from the IRB treatment based on materiality as defined in the following paragraph.

CA-5.5.20

The equity exposures of a bank are considered material if their aggregate value exceeds, on average over the prior year, 10% of bank's Tier 1 plus Tier 2 capital. This materiality threshold is lowered to 5% of a bank's Tier 1 plus Tier 2 capital if the equity portfolio consists of less than 10 individual holdings. CBB may use lower materiality thresholds in future.

CA-5.6.3

For purchased retail receivables, a bank must meet the risk quantification standards for retail exposures but can utilise external and internal reference data to estimate the PDs and LGDs. The estimates for PD and LGD (or EL) must be calculated for the receivables on a stand-alone basis; that is, without regard to any assumption of recourse or guarantees from the seller or other parties.

CA-5.6.4

For purchased corporate receivables, the purchasing bank is required to apply the existing IRB risk quantification standards for the bottom-up approach.

CA-5.7.3

Banks must calculate an EL as PD x LGD for corporate, sovereign, bank, and retail exposures both not in default and not treated as hedged exposures under the double default treatment. For corporate, sovereign, bank, and retail exposures that are in default, banks must use their best estimate of expected loss as defined in paragraph CA-5.8.82 and banks on the foundation approach must use the CBB's LGD. For SL exposures subject to the supervisory slotting criteria EL is calculated as described in paragraphs CA-5.7.4 and CA-5.7.5. For equity exposures subject to the PD/LGD approach, the EL is calculated as PD x LGD unless paragraphs CA-5.5.13 to CA-5.5.16 apply. Securitisation exposures do not contribute to the EL amount, as set out in paragraph CA-6.4.4. For all other exposures, including hedged exposures under the double default treatment, the EL is zero.

CA-5.7.4

For SL exposures subject to the supervisory slotting criteria, the EL amount is determined by multiplying 8% by the risk-weighted assets produced from the appropriate risk weights, as specified below, multiplied by EAD.

Supervisory Categories and EL Risk Weights for other SL Exposures

Supervisory Categories and EL Risk Weights for HVCRE

CA-5.7.7

Total eligible provisions are defined as the sum of all provisions (specific provisions and collective impairment provisions) that are attributed to exposures treated under the IRB approach. In addition, total eligible provisions may include any discounts on defaulted assets. Specific provisions set aside against equity and securitisation exposures must not be included in total eligible provisions.

CA-5.7.8

Banks using the standardised approach for a portion of their credit risk exposures, either on a transitional basis (as defined in paragraphs CA-5.2.44 and CA-5.2.45), or on a permanent basis if the exposures subject to the standardised approach are immaterial (paragraph CA-5.2.46), must determine the portion of collective impairment provisions attributed to the standardised or IRB treatment of provisions (see section CA-2.1 (d) according to the methods outlined in paragraphs CA-5.7.9 and CA-5.7.10.)

CA-5.7.9

Banks should generally attribute total provisions on a pro rata basis according to the proportion of credit risk-weighted assets subject to the standardised and IRB approaches. However, when one approach to determining credit risk-weighted assets (i.e. standardised or IRB approach) is used exclusively within an entity, provisions booked within the entity may be attributed to that approach.

CA-5.7.10

Subject to CBB's discretion, banks using both the standardised and IRB approaches may rely on their internal methods for allocating provisions for recognition in capital under either the standardised or IRB approach, subject to the following conditions. Where the internal allocation method is made available, the CBB will establish the standards surrounding their use. Banks will need to obtain prior approval from CBB to use an internal allocation method for this purpose.

— Standards for Corporate, Sovereign, and Bank Exposures

— Standards for Retail Exposures

— Standards for Corporate, Sovereign, and Bank Exposures

— Standards for Retail Exposures

CA-5.8.22

A bank must have specific rating definitions, processes and criteria for assigning exposures to grades within a rating system. The rating definitions and criteria must be both plausible and intuitive and must result in a meaningful differentiation of risk:

CA-5.8.23

To ensure that banks are consistently taking into account available information, they must use all relevant and material information in assigning ratings to borrowers and facilities. Information must be current. The less information a bank has, the more conservative must be its assignments of exposures to borrower and facility grades or pools. An external rating can be the primary factor determining an internal rating assignment; however, the bank must ensure that it considers other relevant information.

— SL Product Lines within the Corporate Asset Class

CA-5.8.26

Although the time horizon used in PD estimation is one year (as described in paragraph CA-5.8.59), banks are expected to use a longer time horizon in assigning ratings.

CA-5.8.27

A borrower rating must represent the bank's assessment of the borrower's ability and willingness to contractually perform despite adverse economic conditions or the occurrence of unexpected events. For example, a bank may base rating assignments on specific, appropriate stress scenarios. Alternatively, a bank may take into account borrower characteristics that are reflective of the borrower's vulnerability to adverse economic conditions or unexpected events, without explicitly specifying a stress scenario. The range of economic conditions that are considered when making assessments must be consistent with current conditions and those that are likely to occur over a business cycle within the respective industry/geographic region.

CA-5.8.28

Given the difficulties in forecasting future events and the influence they will have on a particular borrower's financial condition, a bank must take a conservative view of projected information. Furthermore, where limited data are available, a bank must adopt a conservative bias to its analysis.

CA-5.8.29

The requirements in this sub-section apply to statistical models and other mechanical methods used to assign borrower or facility ratings or in estimation of PDs, LGDs, or EADs. Credit scoring models and other mechanical rating procedures generally use only a subset of available information. Although mechanical rating procedures may sometimes avoid some of the idiosyncratic errors made by rating systems in which human judgement plays a large role, mechanical use of limited information also is a source of rating errors. Credit scoring models and other mechanical procedures are permissible as the primary or partial basis of rating assignments, and may play a role in the estimation of loss characteristics. Sufficient human judgement and human oversight is necessary to ensure that all relevant and material information, including that which is outside the scope of the model, is also taken into consideration, and that the model is used appropriately:

CA-5.8.30

Banks must document in writing their rating systems' design and operational details. The documentation must evidence banks' compliance with the minimum standards, and must address topics such as portfolio differentiation, rating criteria, responsibilities of parties that rate borrowers and facilities, definition of what constitutes a rating exception, parties that have authority to approve exceptions, frequency of rating reviews, and management oversight of the rating process. A bank must document the rationale for its choice of internal rating criteria and must be able to provide analyses demonstrating that rating criteria and procedures are likely to result in ratings that meaningfully differentiate risk. Rating criteria and procedures must be periodically reviewed to determine whether they remain fully applicable to the current portfolio and to external conditions. In addition, a bank must document a history of major changes in the risk rating process, and such documentation must support identification of changes made to the risk rating process subsequent to the last CBB's review. The organisation of rating assignment, including the internal control structure, must also be documented.

CA-5.8.31

Banks must document the specific definitions of default and loss used internally and demonstrate consistency with the reference definitions set out in paragraphs CA-5.8.63 to CA-5.8.71.

CA-5.8.32

If the bank employs statistical models in the rating process, the bank must document their methodologies. This material must:

CA-5.8.33

Use of a model obtained from a third-party vendor that claims proprietary technology is not a justification for exemption from documentation or any other of the requirements for internal rating systems. The burden is on the model's vendor and the bank to satisfy CBB.

CA-5.8.34

For corporate, sovereign, and bank exposures, each borrower and all recognised guarantors must be assigned a rating and each exposure must be associated with a facility rating as part of the loan approval process. Similarly, for retail, each exposure must be assigned to a pool as part of the loan approval process.

CA-5.8.35

Each separate legal entity to which the bank is exposed must be separately rated. A bank must have policies acceptable to CBB regarding the treatment of individual entities in a connected group including circumstances under which the same rating may or may not be assigned to some or all related entities.

— Standards for Corporate, Sovereign, and Bank Exposures

— Standards for Retail Exposures

CA-5.8.39

For rating assignments based on expert judgement, banks must clearly articulate the situations in which bank officers may override the outputs of the rating process, including how and to what extent such overrides can be used and by whom. For model-based ratings, the bank must have guidelines and processes for monitoring cases where human judgement has overridden the model's rating, variables were excluded or inputs were altered. These guidelines must include identifying personnel that are responsible for approving these overrides. Banks must identify overrides and separately track their performance.

CA-5.8.40

A bank must collect and store data on key borrower and facility characteristics to provide effective support to its internal credit risk measurement and management process, to enable the bank to meet the other requirements in this section, and to serve as a basis for CBB reporting. These data should be sufficiently detailed to allow retrospective re-allocation of obligors and facilities to grades, for example if increasing sophistication of the internal rating system suggests that finer segregation of portfolios can be achieved.

Furthermore, banks must collect and retain data on aspects of their internal ratings as may be required under disclosure requirements specified by CBB periodically.

— For Corporate, Sovereign, and Bank Exposures

— For Retail Exposures

CA-5.8.44

An IRB bank must have in place sound stress testing processes for use in the assessment of capital adequacy. Stress testing must involve identifying possible events or future changes in economic conditions that could have unfavourable effects on a bank's credit exposures and assessment of the bank's ability to withstand such changes. Examples of scenarios that could be used are (i) economic or industry downturns; (ii) market-risk events; and (iii) liquidity conditions.

CA-5.8.45

In addition to the more general tests described above, the bank must perform a credit risk stress test to assess the effect of certain specific conditions on its IRB regulatory capital requirements. The test to be employed would be one chosen by the bank, subject to CBB's review. The test to be employed must be meaningful and reasonably conservative. Individual banks may develop different approaches to undertaking this stress test requirement, depending on their circumstances. For this purpose, the objective is not to require banks to consider worst-case scenarios. The bank's stress test in this context should, however, consider at least the effect of mild recession scenarios. In this case, one example might be to use two consecutive quarters of zero growth to assess the effect on the bank's PDs, LGDs and EADs, taking account — on a conservative basis — of the bank's international diversification.

CA-5.8.46

Banks using the double default framework must consider as part of their stress testing framework the impact of a deterioration in the credit quality of protection providers, in particular the impact of protection providers falling outside the eligibility criteria due to rating changes. Banks should also consider the impact of the default of one but not both of the obligor and protection provider, and the consequent increase in risk and capital requirements at the time of that default.

CA-5.8.47

Whatever method is used, the bank must include a consideration of the following sources of information. First, a bank's own data should allow estimation of the ratings migration of at least some of its exposures. Second, banks should consider information about the impact of smaller deterioration in the credit environment on a bank's ratings, giving some information on the likely effect of bigger, stress circumstances. Third, banks should evaluate evidence of ratings migration in external ratings. This would include the bank broadly matching its buckets to rating categories.

CA-5.8.48

CBB may issue guidance to banks on how the tests to be used for this purpose should be designed, bearing in mind conditions in the Kingdom of Bahrain. The results of the stress test may indicate no difference in the capital calculated under the IRB rules described in this section of this chapter if the bank already uses such an approach for its internal rating purposes. Where a bank operates in several markets, it does not need to test for such conditions in all of those markets, but a bank must stress portfolios containing the vast majority of its total exposures.

CA-5.8.49

All material aspects of the rating and estimation processes must be approved by the bank's board of directors or a designated committee thereof and senior management. These parties must possess a general understanding of the bank's risk rating system and detailed comprehension of its associated management reports. Senior management must provide notice to the board of directors or a designated committee thereof of material changes or exceptions from established policies that will materially impact the operations of the bank's rating system.

CA-5.8.50

Senior management also must have a good understanding of the rating system's design and operation, and must approve material differences between established procedure and actual practice. Management must also ensure, on an ongoing basis, that the rating system is operating properly. Management and staff in the credit control function must meet regularly to discuss the performance of the rating process, areas needing improvement, and the status of efforts to improve previously identified deficiencies.

CA-5.8.51

Internal ratings must be an essential part of the reporting to these parties. Reporting must include risk profile by grade, migration across grades, estimation of the relevant parameters per grade, and comparison of realised default rates (and LGDs and EADs for retail asset class) against expectations. Reporting frequencies may vary with the significance and type of information and the level of the recipient.

CA-5.8.52

Banks must have independent credit risk control units that are responsible for the design or selection, implementation and performance of their internal rating systems. The unit(s) must be functionally independent from the personnel and management functions responsible for originating exposures. Areas of responsibility must include:

CA-5.8.53

A credit risk control unit must actively participate in the development, selection, implementation and validation of rating models. It must assume oversight and supervision responsibilities for any models used in the rating process, and ultimate responsibility for the ongoing review and alterations to rating models.

CA-5.8.54

Internal audit or an equally independent function must review at least bi-annually the bank's rating system and its operations, including the operations of the credit function and the estimation of PDs, LGDs and EADs. Areas of review include adherence to all applicable minimum requirements. Internal audit must document its findings. External auditors are also required to conduct above-mentioned review on an annual basis.

— Structure and Intent

CA-5.8.63

A default is considered to have occurred with regard to a particular obligor when either or both of the two following events have taken place:

CA-5.8.64

The elements to be taken as indications of unlikeliness to pay include:

⁵¹Specific provisions on equity exposures set aside for price risk do not signal default.

⁵²Including, in the case of equity holdings assessed under a PD/LGD approach, such distressed restructuring of the equity itself.

CA-5.8.65

CBB will periodically provide appropriate guidance as to how these elements must be implemented and monitored.

CA-5.8.66

For retail exposures, the definition of default can be applied at the level of a particular facility, rather than at the level of the obligor. As such, default by a borrower on one obligation does not require a bank to treat all other obligations to the banking group as defaulted.

CA-5.8.67

A bank must record actual defaults on IRB exposure classes using this reference definition. A bank must also use the reference definition for its estimation of PDs, and (where relevant) LGDs and EADs. In arriving at these estimations, a bank may use external data available to it that is not itself consistent with that definition, subject to the requirements set out in paragraph CA-5.8.75. However, in such cases, banks must demonstrate to CBB that appropriate adjustments to the data have been made to achieve broad equivalence with the reference definition. This same condition would apply to any internal data used up to implementation of this Module. Internal data (including that pooled by banks) used in such estimates beyond the date of implementation of this Module must be consistent with the reference definition.

CA-5.8.68

If the bank considers that a previously defaulted exposure's status is such that no trigger of the reference definition any longer applies, the bank must rate the borrower and estimate LGD as they would for a non-defaulted facility. Should the reference definition subsequently be triggered, a second default would be deemed to have occurred.

CA-5.8.69

The bank must have clearly articulated and documented policies in respect of the counting of days past due, in particular in respect of the re-ageing of the facilities and the granting of extensions, deferrals, renewals and rewrites to existing accounts. At a minimum, the re-ageing policy must include: (a) approval authorities and reporting requirements; (b) minimum age of a facility before it is eligible for re-ageing; (c) delinquency levels of facilities that are eligible for re-ageing; (d) maximum number of re-ageings per facility; and (e) a reassessment of the borrower's capacity to repay. These policies must be applied consistently over time, and must support the 'use test' (i.e. if a bank treats a re-aged exposure in a similar fashion to other delinquent exposures more than the past-due cut off point, this exposure must be recorded as in default for IRB purposes). The CBB may choose to establish more specific requirements on re-ageing for banks.

CA-5.8.70

Authorised overdrafts must be subject to a credit limit set by the bank and brought to the knowledge of the client. Any break of this limit must be monitored; if the account were not brought under the limit after 90 days, it would be considered as defaulted. Non-authorised overdrafts will be associated with a zero limit for IRB purposes. Thus, days past due commence once any credit is granted to an unauthorised customer; if such credit were not repaid within 90, the exposure would be considered in default. Banks must have in place rigorous internal policies for assessing the creditworthiness of customers who are offered overdraft accounts.

CA-5.8.71

The definition of loss used in estimating LGD is economic loss. When measuring economic loss, all relevant factors should be taken into account. This must include material discount effects and material direct and indirect costs associated with collecting on the exposure. Banks must not simply measure the loss recorded in accounting records, although they must be able to compare accounting and economic losses. The bank's own workout and collection expertise significantly influences their recovery rates and must be reflected in their LGD estimates, but adjustments to estimates for such expertise must be conservative until the bank has sufficient internal empirical evidence of the impact of its expertise.

— Corporate, Sovereign, and Bank Exposures

— Retail Exposures

CA-5.8.79

A bank must estimate an LGD for each facility that aims to reflect economic downturn conditions where necessary to capture the relevant risks. This LGD cannot be less than the long-run default-weighted average loss rate given default calculated based on the average economic loss of all observed defaults within the data source for that type of facility. In addition, a bank must take into account the potential for the LGD of the facility to be higher than the default-weighted average during a period when credit losses are substantially higher than average. For certain types of exposures, loss severities may not exhibit such cyclical variability and LGD estimates may not differ materially (or possibly at all) from the long-run default-weighted average. However, for other exposures, this cyclical variability in loss severities may be important and banks will need to incorporate it into their LGD estimates. For this purpose, banks may use averages of loss severities observed during periods of high credit losses, forecasts based on appropriately conservative assumptions, or other similar methods. Appropriate estimates of LGD during periods of high credit losses might be formed using either internal and/or external data. CBB will continue to monitor and encourage the development of appropriate approaches to this issue.

CA-5.8.80

In its analysis, the bank must consider the extent of any dependence between the risk of the borrower and that of the collateral or collateral provider. Cases where there is a significant degree of dependence must be addressed in a conservative manner. Any currency mismatch between the underlying obligation and the collateral must also be considered and treated conservatively in the bank's assessment of LGD.

CA-5.8.81

LGD estimates must be grounded in historical recovery rates and, when applicable, must not solely be based on the collateral's estimated market value. This requirement recognises the potential inability of banks to gain both control of their collateral and liquidate it expeditiously. To the extent, that LGD estimates take into account the existence of collateral, banks must establish internal requirements for collateral management, operational procedures, legal certainty and risk management process that are generally consistent with those required for the standardised approach.

CA-5.8.82

Recognising the principle that realised losses can at times systematically exceed expected levels, the LGD assigned to a defaulted asset should reflect the possibility that the bank would have to recognise additional, unexpected losses during the recovery period. For each defaulted asset, the bank must also construct its best estimate of the expected loss on that asset based on current economic circumstances and facility status. The amount, if any, by which the LGD on a defaulted asset exceeds the bank's best estimate of expected loss on the asset represents the capital requirement for that asset, and should be set by the bank on a risk-sensitive basis in accordance with paragraphs CA-5.3.3 and CA-5.4.3 to CA-5.4.5. Instances where the best estimate of expected loss on a defaulted asset is less than the sum of specific provisions and partial charge-offs on that asset will attract CBB's scrutiny and must be justified by the bank.

CA-5.8.83

The minimum data observation period for LGD estimates for retail exposures is five years. The less data a bank has, the more conservative it must be in its estimation. A bank need not give equal importance to historic data if it can demonstrate to CBB that more recent data are a better predictor of loss rates.

CA-5.8.84

EAD for an on-balance sheet or off-balance sheet item is defined as the expected gross exposure of the facility upon default of the obligor. For on-balance sheet items, banks must estimate EAD at no less than the current drawn amount, subject to recognising the effects of on-balance sheet netting as specified in the foundation approach. The minimum requirements for the recognition of netting are the same as those under the foundation approach. The additional minimum requirements for internal estimation of EAD under the advanced approach for retail class, therefore, focus on the estimation of EAD for off-balance sheet items (excluding transactions that expose banks to counterparty credit risk as set out in Appendix CA-2). Banks must have established procedures in place for the estimation of EAD for off-balance sheet items for retail asset class. These must specify the estimates of EAD to be used for each facility type. Banks estimates of EAD should reflect the possibility of additional drawings by the borrower up to and after the time a default event is triggered. Where estimates of EAD differ by facility type, the delineation of these facilities must be clear and unambiguous.

CA-5.8.85

Advanced approach banks must assign an estimate of EAD for each facility. It must be an estimate of the long-run default-weighted average EAD for similar facilities and borrowers over a sufficiently long period of time, but with a margin of conservatism appropriate to the likely range of errors in the estimate. If a positive correlation can reasonably be expected between the default frequency and the magnitude of EAD, the EAD estimate must incorporate a larger margin of conservatism. Moreover, for exposures for which EAD estimates are volatile over the economic cycle, the bank must use EAD estimates that are appropriate for an economic downturn, if these are more conservative than the long- run average. For banks that have been able to develop their own EAD models, this could be achieved by considering the cyclical nature, if any, of the drivers of such models. Other banks may have sufficient internal data to examine the impact of previous recession(s). However, some banks may only have the option of making conservative use of external data.

CA-5.8.86

The criteria by which estimates of EAD are derived must be plausible and intuitive, and represent what the bank believes to be the material drivers of EAD. The choices must be supported by credible internal analysis by the bank. The bank must be able to provide a breakdown of its EAD experience by the factors it sees as the drivers of EAD. A bank must use all relevant and material information in its derivation of EAD estimates. Across facility types, a bank must review its estimates of EAD when material new information comes to light and at least on an annual basis.

CA-5.8.87

Due consideration must be paid by the bank to its specific policies and strategies adopted in respect of account monitoring and payment processing. The bank must also consider its ability and willingness to prevent further drawings in circumstances short of payment default, such as covenant violations or other technical default events. Banks must also have adequate systems and procedures in place to monitor facility amounts, current outstandings against committed lines and changes in outstandings per borrower and per grade. The bank must be able to monitor outstanding balances on a daily basis.

CA-5.8.88

For transactions that expose banks to counterparty credit risk, estimates of EAD must fulfill the requirements set forth in Appendix CA-2 of this Module.

CA-5.8.89

The minimum data observation period for EAD estimates for retail exposures is five years. The less data a bank has, the more conservative it must be in its estimation. A bank need not give equal importance to historic data if it can demonstrate to CBB that more recent data are a better predictor of drawdowns.

— Standards for Corporate, Sovereign, and Bank Exposures

— Standards for Retail Exposures

CA-5.8.101

The following minimum requirements for risk quantification must be satisfied for any purchased retail receivables making use of the top-down treatment of default risk and/or the IRB treatments of dilution risk.

CA-5.8.102

The purchasing bank will be required to group the receivables into sufficiently homogeneous pools so that accurate and consistent estimates of PD and LGD (or EL) for default losses and EL estimates of dilution losses can be determined. In general, the risk bucketing process will reflect the seller's underwriting practices and the heterogeneity of its customers. In addition, methods and data for estimating PD, LGD, and EL must comply with the existing risk quantification standards for retail exposures. In particular, quantification should reflect all information available to the purchasing bank regarding the quality of the underlying receivables, including data for similar pools provided by the seller, by the purchasing bank, or by external sources. The purchasing bank must determine whether the data provided by the seller are consistent with expectations agreed upon by both parties concerning, for example, the type, volume and on-going quality of receivables purchased. Where this is not the case, the purchasing bank is expected to obtain and rely upon more relevant data.

— Minimum Operational Requirements

— Legal Certainty

— Effectiveness of Monitoring Systems

— Effectiveness of Work-out Systems

— Effectiveness of Systems for Controlling Collateral, Credit Availability and Cash

— Compliance with the Bank's Internal Policies and Procedures

CA-5.8.117

Eligible CRE and RRE collateral for corporate, sovereign and bank exposures are defined as:

⁵³ If the CBB ascertains that public housing policy is supportive of certain real estate sectors, considering them to be an important part of housing market in Bahrain, by means of guarantees or other credit support from government agencies, then mortgage on such multifamily residential real estate can be recognised as eligible collateral for corporate exposures.

CA-5.8.118

In light of the generic description above and the definition of corporate exposures, income producing real estate that falls under the SL asset class is specifically excluded from recognition as collateral for corporate exposures.

CA-5.8.119

Subject to meeting the definition above, CRE and RRE will be eligible for recognition as collateral for corporate claims only if all of the following operational requirements are met:

CA-5.8.120

Additional collateral management requirements are as follows:

— Definition of Eligible Receivables

— Operational Requirements

CA-5.8.135

To be eligible for the internal models market-based approach a bank must demonstrate to CBB that it meets certain quantitative and qualitative minimum requirements at the outset and on an ongoing basis. A bank that fails to demonstrate continued compliance with the minimum requirements must develop a plan for rapid return to compliance, obtain CBB's approval of the plan, and implement that plan in a timely fashion. In the interim, banks would be expected to compute capital charges using a simple risk weight approach.

CA-5.8.136

CBB will periodically develop detailed examination procedures to ensure that banks' risk measurement systems and management controls are adequate to serve as the basis for the internal models approach.

CA-5.8.137

The following minimum quantitative standards apply for the purpose of calculating minimum capital charges under the internal models approach:

CA-5.8.138

Banks' overall risk management practices used to manage their banking book equity investments are expected to be consistent with the evolving sound practice guidelines issued by the Basel Committee and CBB. With regard to the development and use of internal models for capital purposes, institutions must have established policies, procedures, and controls to ensure the integrity of the model and modelling process used to derive regulatory capital standards. These policies, procedures, and controls should include the following:

CA-5.8.139

Institutions employing internal models for regulatory capital purposes are expected to have in place a robust system to validate the accuracy and consistency of the model and its inputs. They must also fully document all material elements of their internal models and modelling process. The modelling process itself as well as the systems used to validate internal models including all supporting documentation, validation results, and the findings of internal and external reviews are subject to oversight and review by the CBB.

Validation

Documentation