02 November 2022

GBIC comments on the EBA’s supervisory handbook on the validation of IRB rating systems

GBIC has commented on the EBA’s supervisory handbook which sets out expectations for the validation of rating systems that institutions use within the internal ratings based approach (IRBA) to determine their own funds requirements.

We welcome the EBA’s intention to establish transparency on supervisory expectations by developing a general handbook on the validation of IRB rating procedures and thus to provide banks with a consistent and reliable validation framework.

In our view, the organisational setup of the validation function should be independent of the size of the bank and should be evaluated on the basis of criteria geared towards objective validation decisions rather than formal organisational structures. We believe it would make good sense to take greater account of the principle of proportionality. The scale and intensity of validation activities should always be based on the expected data situation, the importance of the rating process and the scale and complexity of the changes made. In our view, the EBA validation handbook should be based on the requirements set out in the General topics chapter of the EGIM (ECB guide to internal models). These have proven their worth. Instead of detailed organisational requirements, such as separate units for the operation of development and validation activities, we would recommend using organisational measures (including institutionalised monitoring procedures) to ensure that there are no conflicts of interest between development and validation activities...

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