Question
Considering a rating structure defined according to article 170 of CRR, would the consideration of conservatism in the application of risk parameters alter such structure? In particular, do homogeneity analyses need to be conducted before or after the consideration of the conservatism in the application of risk parameters described in section 8.1 of the EBA/GL/2017/16?
Background on the question
Following the structure of the EBA/GL/2017/16, risk differentiation and risk quantification processes (including the quantification of margins of conservatism) lead to determine the structure of the rating system, including the assignment of exposures to grade or pools and the quantification of risk associated to such grades/pools. In addition, the EBA/GL/2017/16 consider an additional step, which is the consideration of conservatism in the application of risk parameters. The question is whether in this posterior step the structure of the rating system can be altered. For instance, consider the application of a 10% add-on on PDs whose underlying rating/score is outdated. Would this lead to the generation of additional grades/pools? If so, do homogeneity analyses need to be conducted over this potential new grading structure?
Answer
This question has been rejected because the issue it raises is beyond the remit of the Q&A process as it would require a revision of the Guidelines on PD, LGD, and Assessment Methodology and therefore it cannot be addressed via a Q&A.The Single Rule Book Q&A tool has been established to provide explanations and non-binding interpretations on questions relating to the practical application or implementation of the provisions of legislative acts referred to in Article 1(2) of the EBA’s founding Regulation, as well as associated delegated and implementing acts, and guidelines and recommendations, adopted under these legislative acts. The Q&A process cannot, for example, consider issues which would require changes to the regulatory framework.For further information on the purpose of this tool and on how to submit questions, please see “Additional background and guidance for asking questions”.