Completeness of the documentation of rating systems
Article 31
1. When assessing the completeness of the documentation on the design, operational details and rationale of the rating systems as referred to in Article 144(1)(e) and set out in Article 175 of Regulation (EU) No 575/2013, competent authorities shall verify that the documentation is complete and includes the following: (a) the adequacy of the rating system and the models used within the rating system taking into account the portfolio characteristics; (b) a description of data sources and data cleansing practices; (c) definitions of default and loss; (d) methodological choices; (e) technical specification of the models; (f) the weaknesses and limitations of the models and possible mitigating factors thereof; (g) the results of the implementation tests of the models in the IT systems, in particular information on whether the implementation was successful and error-free; (h) a self-assessment of compliance with regulatory requirements for the Internal Ratings Based Approach as referred to in Articles 169 to 191 of Regulation (EU) No 575/2013. 2. For the purposes of the verification under paragraph 1(a), competent authorities shall verify that: (a) the documentation clearly outlines the purpose of the rating system and the models; (b) the documentation includes a description of the range of application of the rating system and the scope of application of the models used within the rating system, i.e. a specification of the type of exposures covered by each model within the rating system, both in a qualitative and in a quantitative manner, the type of outputs of each model and the use made of the outputs; (c) the documentation includes an explanation about how the information obtained by means of the rating system and the results of the models is taken into account for the purposes of risk management, decision-making and credit approval processes, as referred to in Article 19. 3. For the purposes of the verification under paragraph 1(b), competent authorities shall verify that the documentation includes: (a) detailed information regarding all data used for the model development, including a precise definition of the content of the model, its source, format and coding and, where applicable, exclusions of data from it; (b) any data cleansing procedures including procedures for data exclusions, outlier detection and treatment and data adaptations, as well as an explicit justification for their use and an evaluation of their impact. 4. For the purposes of the verification under paragraph 1(c), competent authorities shall verify whether the definitions of default and loss used in the development of the model are adequately documented, in particular where other definitions of default are used for the purpose of model specification than those which are used by the institution in accordance with Article 178 of Regulation (EU) No 575/2013. 5. For the purposes of the verification under paragraph 1(d), competent authorities shall verify that the documentation includes: (a) details on the design, theory, assumptions, and logic underlying the model; (b) detailed descriptions of the model methodologies and their rationale, statistical techniques and approximations and, where appropriate, the rationale and details on segmentation methods, the outputs of statistical processes and the diagnostics and measures of predictive power of the models; (c) the role of experts from the relevant business areas in developing the rating system and models, including a detailed description of the consultation process with experts from the relevant business areas in the design of the rating system and models as well as outputs and rationale provided by those experts from the relevant business areas; (d) an explanation of how the statistical model and human judgement are combined to derive the final model output; (e) an explanation of how the institution takes into account unsatisfactory quality of data, lack of homogeneous pools of exposures, changes in business processes, economic or legal environment and other factors relating to quality of data that may affect the performance of the rating system or model; (f) a description of the analyses performed for the purposes of statistical models or other mechanical methods, as applicable: (i) the univariate analysis of the variables considered and respective criteria for variable selection; (ii) the multivariate analysis of the variables selected and respective criteria for variable selection; (iii) the procedure for the design of the final model, including: — the final selection of variables, — adjustments based on human judgement to the variables resulting from the multivariate analysis, — transformations of the variables, — assignment of weights to the variables, — the method of composition of model components, in particular where the contribution of qualitative and quantitative components is joined. 6. For the purposes of the verification under paragraph 1(e), competent authorities shall verify that the documentation includes: (a) the technical specification of the final model structure including final model specifications, input components including type and format of selected variables, weights applied for variables and output components including type and format of output data; (b) references to the computer codes and tools used in terms of IT languages and programs allowing a third party to reproduce the final results. For the purposes of point (b), the third party may be the vendor in the case of vendor models. 7. For the purposes of the verification under paragraph 1(f), competent authorities shall verify that the documentation includes a description of the weaknesses and limitations of the model, an assessment of whether the key assumptions of the model are met and an anticipation of situations where the model may perform below expectations or become inadequate, as well as an assessment of the significance of model weaknesses and possible mitigating factors thereof. 8. For the purposes of the verification under paragraph 1(g), competent authorities shall verify that: (a) the documentation specifies the process to be followed when a new or changed model is implemented in the production environment; (b) the documentation covers the results of the tests of the implementation of the rating models in the IT systems, including the confirmation that the rating model implemented in the production system is the same as the one described in the documentation and is operating as intended. 9. For the purposes of the verification under paragraph 1(h), competent authorities shall verify that the institution’s self-assessment of compliance with regulatory requirements for the IRB Approach is performed separately for each rating system and is reviewed by the internal audit or another comparable independent auditing unit.