Independent Review of the Credit Rating Model in line with CBB Rulebook Volume 2 requirements
Reviewed credit risk management policies, methodology and model of the Bank.
Policy Review
- Assessed completeness and scope, and whether all relevant credit risk management aspects are covered.
- Assessed alignment with the bank’s risk appetite and strategic objectives
- Assessed credit underwriting, analysis and due diligence policies & alignment of the policy to CBB regulations
- Reviewed credit approval policies, including delegation of authority, lending limits, and exception management.
- Assessed credit monitoring and reporting procedures for timely identification and communication of credit risks to management and board-level risk committees.
Methodology Review
- Assessed methodologies used for credit risk measurement, including
- probability of default (PD) – segment-level validation on PD term structure, default definition, and the rating scale, etc.
- loss given default (LGD) – review of recovery rate modelling and sensitivity analysis, treatment of LGD segmentation, and back-testing of modelled LGD.
- and exposure at default (EAD) – review of current exposure method and potential future exposure estimation, conversion factors for undrawn credit lines, regulatory benchmarking, etc.
- Assessed risk mitigation strategies, such as collateral management, guarantees, covenants, etc.
- Assessed the stress testing framework to ensure it adequately considers adverse scenarios for credit portfolios.
Reviewed the detailed model document related to the rating model.
Assessed completeness, structure, and clarity of model documents, and evaluating whether they adequately describe the following.
- Model’s purpose and role in the Bank’s risk management framework
- Scope and coverage, in terms of borrower segments, asset classes, and risk measurement
- Model design and assumptions, including development process, mathematical/statistical formulation, treatment of missing/incomplete data, etc.
- Data inputs and sources and data quality/source assessment procedures
- Output descriptions, including PD, LGD, EAD, risk ratings, and ECL
- Processes followed for model validation, monitoring, and reporting
- Model governance framework, including access controls, roles and responsibilities, version control, etc.
- Model risk management framework, including the identification, assessment, and mitigation of model risk
Review the Master Rating Scale developed for the Bank.
- Assessed design and structure of MRS to evaluate count and granularity rating grades, alignment with risk appetite, mapping to external credit ratings, and adequate segmentation by borrower type and asset class
- Assessed consistency and accuracy of the rating scale across different asset classes and borrower segments & criteria to assign credit ratings
- Assessed calibration of rating grades in relation to PD
- Assessed use of the MRS in credit decision-making, capital allocation, RWA calculation and credit risk monitoring & compliance of MRS to CBB regulations
Perform quantitative & qualitative validation of the rating model and validate probability of default calibration
- Validated reliability of PD estimates for each rating grade, including statistical technique, assessment of data inputs & PIT vs TTC calibration.
- Ensured that PD calibration is consistent with CBB & IFRS 9 requirements and with improvement recommendations.
- Reviewed accuracy of LGD, and EAD calculations & validated model assumptions
- Assessed criteria for classification of financial assets into different stages based on credit risk changes and ratings
- Reviewed impairment calculations reflecting credit deterioration.
- Verified that the Rating model produces reasonable and accurate results across different portfolios, time horizons, and scenarios.
- Assessed stress testing and scenario analysis frameworks
- Conducting back testing exercises to assess how well rating grades correspond to actual borrower performance