8.2 Human judgement in the application of risk parameters

Institutions may use human judgement in the application of the model in the following cases:

• (a) in the application of the qualitative variables used within the model;
• (b) via overrides of the inputs of the rating assignment process;
• (c) via overrides of the outputs of the rating assignment process.

Institutions should specify clear criteria for the use of qualitative model inputs and they should ensure a consistent application of such inputs by all relevant personnel and a consistent assignment of obligors or facilities posing similar risk to the same grade or pool as required by Article 171(1)(a) of Regulation (EU) No 575/2013.

For the purpose of Article 172(3) of Regulation (EU) No 575/2013 institutions should specify the policies and criteria for the use of overrides in the rating assignment process. These policies should refer both to possible overrides of inputs and outputs of such process and should be specified in a conservative manner such that the scale of conservative overrides should not be limited. In contrast, the scale of potential decreases of the estimates resulting from the model, either by overriding the inputs or outputs of the rating assignment process, should be limited. In applying the overrides institutions should take into account all relevant and up-to-date information.

Institutions should document the scale and rationale of each override. Wherever possible institutions should specify a predefined list of possible justifications of the overrides to choose from. Institutions should also store information on the date of override and the person that performed and approved it.

Institutions should regularly monitor the level and justifications for overrides of inputs and outputs of the rating assignment process. They should specify in their policies the maximum acceptable rate of overrides for each model. Where those maximum levels are breached, adequate measures should be taken by the institution. The rates of overrides should be specified and monitored at the level of calibration segment. Where there is a high number of overrides institutions should adopt adequate measures to improve the model.

Institutions should regularly analyse the performance of exposures in relation to which an override of input or output of the rating assignment process has been performed in accordance with Article 172(3) of Regulation (EU) No 575/2013.

Institutions should regularly assess the performance of the model before and after the overrides of outputs of the rating assignment process. Where the assessment concludes that the use of overrides significantly decreased the model’s capacity to accurately quantify the risk parameters (‘predictive power of the model’), institutions should adopt adequate measures to ensure the correct application of overrides.