Article 11
Completeness and frequency of the validation process
1. When assessing the completeness of the validation function for the purposes of the requirements laid down in Article 144(1)(f), Article 174(d), Article 185 and Article 188 of Regulation (EU) No 575/2013, competent authorities shall verify that:
|
(a) |
the institution has defined and documented a complete validation process for all rating systems; |
|
(b) |
the institution performs the validation process referred to in point (a) with an adequate frequency. |
2. When assessing the completeness of the validation process as referred to in paragraph 1(a), competent authorities shall verify that the validation function:
|
(a) |
critically reviews all the aspects of the specification of the internal ratings and risk parameters, including the procedures for data collection and data cleansing, the choices of the methodology and model structure, and the process for the selection of the variables; |
|
(b) |
verifies the adequacy of the implementation of internal ratings and risk parameters in IT systems and that grade and pool definitions are consistently applied across departments and geographic areas of the institution; |
|
(c) |
verifies the performance of the rating systems taking into account at least risk differentiation and quantification and the stability of the internal ratings and risk parameters and the model specifications; |
|
(d) |
verifies all changes relating to internal ratings and risk parameters and their materiality in accordance with the Delegated Regulation (EU) No 529/2014 and that it consistently follows up on its own conclusions, findings and recommendations. |
3. When assessing whether the frequency of the validation process referred to in paragraph 1(b) is adequate, competent authorities shall verify that the validation process is performed regularly for all rating systems of the institution following an annual work plan and that:
|
(a) |
for all rating systems the processes required by Article 185(b) and Article 188(c) of Regulation (EU) No 575/2013 (‘back-testing’) are performed at least once annually; |
|
(b) |
for the rating systems covering material types of exposures, the verification of the performance of the rating systems as referred to in paragraph 2(c), takes place at least once annually. |
4. Where an institution applies for permission to use the internal ratings and risk parameters of a rating system or for any material changes to internal ratings and risk parameters of a rating system, competent authorities shall verify that the institution performs the validation referred to in paragraph 2(a), (b) and (c) before the rating system is used for the calculation of own funds requirements and for internal risk management purposes.