37. For the purposes of identifying and classifying all deficiencies referred to in paragraph 36 …

For the purposes of identifying and classifying all deficiencies referred to in paragraph 36 institutions should take into account all relevant deficiencies in methods, processes, controls, data or IT systems that have been identified by the credit risk control unit, validation function, internal audit function or any other internal or external review and should analyse at least all of the following potential sources of additional uncertainty in risk quantification:

• (a) under category A:
• (i) missing or materially changed default triggers in historical observations, including changed criteria for recognition of materially past due credit obligations;
• (ii) missing or inaccurate date of default;
• (iii) missing, inaccurate or outdated rating assignment used for assessing historical grades or pools for the purpose of calculation of default rates or average realised LGDs per grade or pool;
• (iv) missing or inaccurate information on the source of cash flows;
• (v) missing, inaccurate or outdated data on risk drivers and rating criteria;
• (vi) missing or inaccurate information used for the estimation of future recoveries as referred to in paragraph 159;
• (vii) missing or inaccurate data for the calculation of economic loss;
• (viii) limited representativeness of the historical observations due to the use of external data;
• (ix) potential bias stemming from the choice of the approach to calculating the average of observed one year default rates in accordance with paragraph 80;
• (x) necessity of adjusting the average of observed one-year default rates in accordance with paragraph 86;
• (xi) missing information for the purpose of estimating loss rates or for the purpose of reflecting economic downturn in LGD estimates;
• (b) under category B:
• (i) changes to underwriting standards, collection or recovery policies, risk appetite or other relevant internal processes;
• (ii) unjustified deviations in the ranges of values of the key risk characteristics of the application portfolio compared with those of the dataset used for risk quantification;
• (iii) changes to market or legal environment;
• (iv) forward-looking expectations regarding potential changes in the structure of the portfolio or the level of risk, especially based on actions or decisions that have already been taken but which are not reflected in the observed data.

4.4.2 Appropriate adjustment

1. Overview

1.1 References

1.2 Identified Requirements

1.3 Related Standards

2. Identified Requirements

3. Related Standards

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