Risk differentiation
Article 35
1. When assessing the risk differentiation of each rating system for the purposes of points (b) and (c) of paragraph 3 of Article 170 of Regulation (EU) No 575/2013 for retail exposures, competent authorities shall verify all of the following: (a) that the tools used to assess risk differentiation are sound and adequate considering the available data and that the adequate risk differentiation is evidenced with records of time series of realised default rates or loss rates for grades or pools under various economic conditions; (b) that the expected performance of the rating system as regards risk differentiation is defined by the institution by means of clearly established fixed targets and tolerances for defined metrics and tools as well as actions to rectify deviations from these targets or tolerances; separate targets and tolerances may be defined for the initial development and the ongoing performance; (c) that the targets and tolerances for defined metrics and tools and mechanisms applied to meet those targets and tolerances ensure sufficient differentiation of risk. 2. The competent authorities shall also apply paragraph 1 to the assessment of risk differentiation for exposures other than retail exposures pursuant to Article 170(1) of Regulation (EU) No 575/2013 if a sufficient quantity of data is available for this to be possible.