67. A sound model validation framework should include, but not be limited to, the following …

A sound model validation framework should include, but not be limited to, the following elements:

• a. Clear roles and responsibilities for model validation with adequate independence and competence. Model validation should be performed independently of the model development process and by staff with the necessary experience and expertise. The findings and outcomes of model validation should be reported in a prompt and timely manner to the appropriate level of authority. Where a credit institution has outsourced its validation function to an external party, the credit institution remains responsible for the effectiveness of all model validation work and should ensure that the work done by the external party meets the elements of a sound model validation framework on an ongoing basis.
• b. An appropriate model validation scope and methodology should include a systematic process of evaluating the model’s robustness, consistency and accuracy as well as its continued relevance to the underlying individual lending exposure or portfolio. An effective model validation process should also enable potential limitations of a model to be identified and addressed on a timely basis. The scope for validation should include a review of model inputs, model design and model outputs/performance.
• • Model inputs: Credit institutions should have internally established quality and reliability standards on data (historical, current and forward-looking information) used as model inputs. Data used to estimate ECL allowances should be relevant to the credit institutions’ portfolios and, as far as possible, accurate, reliable and complete (i.e. without exclusions that could bias ECL estimates). Validation should ensure that the data used meet these standards.
• • Model design: For model design, validation should assess that the underlying theory of the model is conceptually sound, recognised and generally accepted for its intended purpose. From a forward-looking perspective, validation should also assess the extent to which the model, at the overall model and individual risk factor level, can take into consideration changes in the economic or credit environment, as well as changes to portfolio business profile or strategy, without significantly reducing model robustness.
• • Model output/performance: Credit institutions should have internally established standards for acceptable model performance. Where performance thresholds are significantly breached, remedial actions up to the extent of model re-calibration or re-development should be taken.
• c. Comprehensive documentation of the model validation framework and process. This should include documenting the validation procedures performed, any changes in validation methodology and tools, the range of data used, validation results and any remedial actions taken where necessary. Credit institutions should ensure that the documentation is regularly reviewed and updated.
• d. A review of the model validation process by independent parties (e.g. internal or external parties) to evaluate the overall effectiveness of the model validation process and the independence of the model validation process from the development process. The findings of the review should be reported in a prompt and timely manner to the appropriate level of authority (e.g. senior management, audit committee).

4.2.6 Principle 6 — Experienced credit judgement

A credit institution’s use of experienced credit judgement, especially in the consideration of reasonable and supportable forward-looking information, including macroeconomic factors, is essential to the assessment of credit risk and measurement of ECL.

1. Forbhreathnú

1.1 Tagairtí

1.2 Ceanglais aitheanta

1.3 Caighdeáin ghaolmhara

2. Ceanglais aitheanta

3. Caighdeáin ghaolmhara

• EBA - Published by the European Banking Authority at https://www.eba.europa.eu/