Guidelines on Credit Risk Management Rating Models and Validation

Guidelines on Credit Risk Management Rating Models and Validation ≈√ These guidelines were prepared by the Oesterreichische Nationalbank (OeNB) in cooperation with the Financial Market Authority (FMA) Published by: Oesterreichische Nationalbank (OeNB) Otto Wagner Platz 3, 1090 Vienna, Austria Austrian Financial Market Authority (FMA) Praterstrasse 23, 1020 Vienna, Austria Produced by: Oesterreichische Nationalbank Editor in chief: Gu‹nther Thonabauer, Secretariat of the Governing Board and Public Relations (OeNB) Barbara No‹sslinger, Staff Department for Executive Board Affairs and Public Relations (FMA) Editorial processing: Doris Datschetzky, Yi-Der Kuo, Alexander Tscherteu, (all OeNB) Thomas Hudetz, Ursula Hauser-Rethaller (all FMA) Design: Peter Buchegger, Secretariat of the Governing Board and Public Relations (OeNB) Typesetting, printing, and production: OeNB Printing Office Published and produced at: Otto Wagner

Platz 3, 1090 Vienna, Austria Inquiries: Oesterreichische Nationalbank Secretariat of the Governing Board and Public Relations Otto Wagner Platz 3, 1090 Vienna, Austria Postal address: PO Box 61, 1011 Vienna, Austria Phone: (+43-1) 40 420-6666 Fax: (+43-1) 404 20-6696 Orders: Oesterreichische Nationalbank Documentation Management and Communication Systems Otto Wagner Platz 3, 1090 Vienna, Austria Postal address: PO Box 61, 1011 Vienna, Austria Phone: (+43-1) 404 20-2345 Fax: (+43-1) 404 20-2398 Internet: http://www.oenb.at http://www.fma.gv.at Paper: Salzer Demeter, 100% woodpulp paper, bleached without chlorine, acid-free, without optical whiteners DVR 0031577 The ongoing development of contemporary risk management methods and the increased use of innovative financial products such as securitization and credit derivatives have brought about substantial changes in the business environment faced by credit institutions today. Especially in the field of lending, these changes and innovations are now forcing banks to adapt their in-house software systems and the relevant business processes to meet these new requirements. The OeNB Guidelines on Credit Risk Management are intended to assist practitioners in redesigning a bankC213s systems and processes in the course of implementing the Basel II framework. Throughout 2004 and 2005, OeNB guidelines will appear on the subjects of securitization, rating and validation, credit approval processes and management, as well as credit risk mitigation techniques. The content of these guidelines is based on current international developments in the banking field and is meant to provide readers with best practices which banks would be well advised to implement regardless of the emergence of new regulatory capital requirements. The purpose of these publications is to develop mutual understanding between regulatory authorities and banks with regard to the upcoming changes in banking. In this context, the Oesterreichische Nationalbank (OeNB), Aus- triaC213s central bank, and the Austrian Financial Market Authority (FMA) see themselves as partners to AustriaC213s credit industry. It is our sincere hope that the OeNB Guidelines on Credit Risk Management provide interesting reading as well as a basis for efficient discussions of the cur- rent changes in Austrian banking. Vienna, November 2004 Univ.Doz.Mag.Dr.Josef Christl Member of the Governing Board of the Oesterreichische Nationalbank Dr.Kurt Pribil, Dr. Heinrich Traumu‹ller FMA Executive Board Preface Guidelines on Credit Risk Management 3 I INTRODUCTION 7 II ESTIMATING AND VALIDATING PROBABILITY OF DEFAULT (PD) 8 1 Defining Segments for Credit Assessment 8 2 Best-Practice Data Requirements for Credit Assessment 11 2.1 Governments and the Public Sector 12 2.2 Financial Service Providers 15...

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