Credit rating model validation toolkit

EconLab’s rating model validation framework is a solution which complements the qualitative validation with a set of predefined quantitative tests. It facilitates the banks in faster execution of the validation procedures by providing programming language scripts which numerically and graphically present the rating model’s performance, stability, representativeness and calibration metrics. The solution can be used for both IRB and non-IRB compliant rating models.

Our Expertise

  • Regulatory and supervisory compliance
  • Wide test coverage
  • Technical flexibility
  • Automated reporting

The complete set of test covers significant regulatory expectations regarding validation of rating models. The toolkit is aligned with EBA guidelines on PD estimation. The included quantitative tests are optimal for suitable preparation for TRIM and the validation itself meets the TRIM expectations.

Automated testing is based on predefined set of data which needs to be imported into the tool.  The tool comprises a wide, but not exhaustive set of quantitative tests as it enables incorporation of additional tests with relative ease, as deemed important by the bank or the supervisor. Tool currently tests in areas such as population representativeness, discriminatory power, accuracy, homogeneity, calibration (LRA), stability and MoC.

The reference toolkit is based on SQL and Python, but the toolkit can be converted to most widely used programming languages and environments. Full customization to the client needs is also possible. The toolkit can be supplied with fully open source code (resale restrictions) allowing clients to later adapt the code to changing circumstances. The toolkit delivery can be accompanied with extensive knowledge transfer services, including workshops, explanation of the methodologies, and initial assistance in toolkit usage, and setting up input data requirements.

The tool can generate a comprehensive validation report that includes all the quantitative information needed and the related graphics. Human validator needs to add specific interpretation of the results after the fact. The report is by default produced in Word or Pdf format but can be adjusted to client’s needs.

Selected references

EconLab was a developer of IRB models for pillar Irish bank. We have critical experience when it comes to regulatory expectations of an IRB compliant model and assisting the JST during TRIM inspections. We have had full insight into the TRIM testing procedures and recommendations stemming from the inspections.

EconLab has performed the complete validation for corporate credit rating model for Slovenian subsidiary of a Serbian bank. We have tailored the validation methodology to meet bank’s data availability and proposed a data model which would allow the bank to perform every test in our toolkit.

EconLab has established a credit rating validation methodology suitable for smaller banks. The validation involves a reduced number of tests to take into account the proportionality and materiality aspect of systemically non-important banks.

Our team has experience in quality assurance of bank’s impairment models conducted by big auditing firms. Consequently, EconLab has important knowledge of the auditor’s expectations with regards to comprehensive validation frameworks and methodologies.