Directive 2006/48/EC of the European Parliament and of the council (repealed)Show full title

5. CORPORATE GOVERNANCE AND OVERSIGHT

5.1. Corporate Governance

124. All material aspects of the rating and estimation processes shall be approved by the credit institution's management body described in Article 11 or a designated committee thereof and senior management. These parties shall possess a general understanding of the credit institution's rating systems and detailed comprehension of its associated management reports.

125. Senior management shall provide notice to the management body described in Article 11 or a designated committee thereof of material changes or exceptions from established policies that will materially impact the operations of the credit institution's rating systems.

126. Senior management shall have a good understanding of the rating systems designs and operations. Senior management shall ensure, on an ongoing basis that the rating systems are operating properly. Senior management shall be regularly informed by the credit risk control units about the performance of the rating process, areas needing improvement, and the status of efforts to improve previously identified deficiencies.

127. Internal ratings-based analysis of the credit institution's credit risk profile shall be an essential part of the management reporting to these parties. Reporting shall include at least risk profile by grade, migration across grades, estimation of the relevant parameters per grade, and comparison of realised default rates, and to the extent that own estimates are used of realised LGDs and realised conversion factors against expectations and stress-test results. Reporting frequencies shall depend on the significance and type of information and the level of the recipient.

5.2. Credit risk control

128. The credit risk control unit shall be independent from the personnel and management functions responsible for originating or renewing exposures and report directly to senior management. The unit shall be responsible for the design or selection, implementation, oversight and performance of the rating systems. It shall regularly produce and analyse reports on the output of the rating systems.

129. The areas of responsibility for the credit risk control unit(s) shall include:

(a)

testing and monitoring grades and pools;

(b)

production and analysis of summary reports from the credit institution's rating systems;

(c)

implementing procedures to verify that grade and pool definitions are consistently applied across departments and geographic areas;

(d)

reviewing and documenting any changes to the rating process, including the reasons for the changes;

(e)

reviewing the rating criteria to evaluate if they remain predictive of risk. Changes to the rating process, criteria or individual rating parameters shall be documented and retained;

(f)

active participation in the design or selection, implementation and validation of models used in the rating process;

(g)

oversight and supervision of models used in the rating process; and

(h)

ongoing review and alterations to models used in the rating process.

130. Notwithstanding point 129, credit institutions using pooled data according to points 57 and 58 may outsource the following tasks:

(a)

production of information relevant to testing and monitoring grades and pools;

(b)

production of summary reports from the credit institution's rating systems;

(c)

production of information relevant to review of the rating criteria to evaluate if they remain predictive of risk;

(d)

documentation of changes to the rating process, criteria or individual rating parameters; and

(e)

production of information relevant to ongoing review and alterations to models used in the rating process.

Credit institutions making use of this point shall ensure that the competent authorities have access to all relevant information from the third party that is necessary for examining compliance with the minimum requirements and that the competent authorities may perform on-site examinations to the same extent as within the credit institution.

5.3. Internal Audit

131. Internal audit or another comparable independent auditing unit shall review at least annually the credit institution's rating systems and its operations, including the operations of the credit function and the estimation of PDs, LGDs, ELs and conversion factors. Areas of review shall include adherence to all applicable minimum requirements.