Conservatism in the application of risk parameters
For the purpose of Article 171(2) of Regulation (EU) No 575/2013 institutions should apply additional conservatism to the outcomes of the rating assignment where any deficiencies are identified related to the implementation of the model in the IT system or to the process of assignment of risk parameters to obligors or facilities in the current portfolio (application of risk parameters), especially when those deficiencies relate to data used in the rating assignment process. They should do so by establishing a framework that consists of the following phases:
identification of deficiencies of implementation of the model in the IT system or application of risk parameters;
specification of the form of conservatism to be applied and quantification of the appropriate level of conservatism;
monitoring of the deficiencies and correcting them;
documentation.
For the purpose of paragraph 195(a) institutions should have a robust process for identifying all implementation and application deficiencies in the assignment process, whereby each deficiency leads to additional conservative treatment in the affected assignment to a grade or pool. Institutions should consider at least the following triggers for additional conservatism:
missing data in the application portfolio;
missing updates of financial statements or credit bureau data as referred to in paragraph 59(h);
outdated ratings in the application portfolio; where outdated rating should be understood as specified in Article 25(2)(b) of the RTS on IRB methodology;
missing ratings, whereby an exposure is considered as being within the scope of application of the IRB model but is not rated by it.
For the purpose of paragraph 195(b) institutions should ensure that the occurrence of any of the triggers referred to in paragraph 196 results in the application of additional conservatism to the risk parameter for the purpose of the calculation of risk-weighted exposure amounts. Where more than one trigger occurs, the estimate should be more conservative. The additional conservatism related to each trigger should be proportionate to the uncertainty in the estimated risk parameter introduced by the trigger.
Institutions should consider the overall impact of the identified deficiencies and the resulting conservatism at the level of portfolio covered with the relevant model on the soundness of the assignments to grades or pools and ensure that the own funds requirements are not distorted by the necessity of excessive adjustments.
For the purpose of paragraph 195(c) institutions should regularly monitor the implementation and application deficiencies and the levels of additional conservatism applied in relation to them. Whenever possible, institutions should take steps to address the identified deficiencies. Following its assessment, the institution should develop a plan to rectify the deficiencies within a reasonable timeframe, taking into consideration the magnitude of the impact on the own funds requirements.
For the purpose of paragraph 195(d) institutions should specify adequate manuals and procedure for applying additional conservatism and should document the process applied in addressing implementation and application deficiencies. Such documentation should contain at least the triggers considered and the effects that the activation of such triggers had on the final assignment to a grade or pool, the level of risk parameter and on the own funds requirements.