Model design
Article 38
When assessing the rating model design for the purposes of Article 174(a) of Regulation (EU) No 575/2013, competent authorities shall verify: (a) the adequacy of the model having regard to its specific application; (b) the institution’s analysis of alternative assumptions or alternative approaches to those chosen in the model; (c) the institution’s methodology for model development; (d) that relevant staff of the institution fully understands the model’s capabilities and limitations, in particular that the model documentation of the institution: (i) describes which of the model limitations are related to the model inputs, uncertain assumptions, the processing component of the model, and whether the model output is performed manually or in the IT system; (ii) identifies situations where the model can perform below expectations or become inadequate and contains an assessment of the materiality of model weaknesses and possible mitigating factors thereof.