Page 51 Guidance On Application Procedures “PD/LGD/EAD estimation”, For Adoption Of The IRB Approach By Banks Licensed In Saudi Arabia
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The original paragraph was as follows
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| 4.1.9 | Banks may utilise internal data and data from external sources (including pooled data) in there own estimation. Where such data are used, banks should demonstrate that their estimates are representative of long run experience.
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The revised paragraph would read as follows
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Banks should make use of other quantitative validation tools and comparisons with external data sources. The analysis must be based on data that are appropriate to the portfolio, are updated regularly, and cover a relevant observation period. Banks‘ internal assessments of the performance of their own model must be based on long data histories, covering a range of economic conditions, and ideally one or more complete business cycles.
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(Refer Paragraph 532 of International Convergence of Capital Measurement and Capital Standards – June 2006)
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Page 19, 4.6.3, (last bullet point) Guidance On Application Procedures, For Adoption Of The IRB Approach By Banks Licensed In Saudi Arabia
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The original bullet point read as follows:
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Requirements for using models:
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Banks should have procedures for management review of model-based rating assignments. Such procedures should focus on finding and limiting errors associated with model weaknesses. Banks should have a regular cycle of model validation that includes monitoring of model performance and stability, review of model relationships, and testing of model outputs against outcomes.
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The revised bullet would read as follows:
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Since the evaluation of actual performance to expected performance over time provides a basis for banks to refine and adjust internal models on an ongoing basis, it is expected that banks using internal models will have established well- articulated model review standards. These standards are especially important for situations where actual results significantly deviate from expectations and where the validity of the internal model is called into question. These standards must take account of business cycles and similar systematic variability in equity returns. All adjustments made to internal models in response to model reviews must be well documented and consistent with the bank‘s model review standards.
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(Refer Paragraph 534 of International Convergence of Capital Measurement and Capital Standards – June 2006)
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