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Model Validation

In: Retail Credit Risk Management

Author

Listed:
  • Antonio Arfé
  • Paolo Gianturco

Abstract

The internal validation of rating systems is part of the general framework for rating system controls. According to both Italian and international regulatory requirements, validation activities should not be confined to empirical validation methods and tests, but should assess the overall functioning of the rating system along different dimensions that include method, the IT system and data quality, and processes and governance. Following the Basel Committee on Banking Supervision guidelines (2006, p.109), to comply with the normative framework, “banks must have a robust system in place to validate the accuracy and consistency of rating systems, processes, and the estimation of all relevant risk components. A bank must demonstrate to its supervisor that the internal validation process enables it to assess the performance of internal rating and risk estimation systems consistently and meaningfully.”

Suggested Citation

  • Antonio Arfé & Paolo Gianturco, 2013. "Model Validation," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Mario Anolli & Elena Beccalli & Tommaso Giordani (ed.), Retail Credit Risk Management, chapter 6, pages 109-133, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-1-137-00676-9_6
    DOI: 10.1057/9781137006769_6
    as

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