Rating systems control and review

In the area of retail exposures, the final risk grade (rating) is awarded automatically. In respect to corporate exposures, risk grades are awarded to clients and changed when necessary during their term by the specialized Ratings Department.

Management of rating models, including the performance of control functions, is regulated in internal procedures pertaining to model development, model calibration and model monitoring. Responsibility for these actions has been assigned to designated model owners.

In order to ensure the appropriate control and review of the rating systems (adequate estimation of risk parameters and correct course of the rating and credit decision process), a validation and monitoring process has been introduced.

The monitoring process is performed by the unit responsible for model development.

The validation process is performed by a unit independent from the organizational units responsible for model development.

The following units handle the monitoring and validation process:

• The Risk Committee, which has general responsibility for risk control;
• The Bank’s Validation Committee which is responsible for confirming the results risk models validation and for continuing the implementation of the measures prescribed by the Model Validation Bureau. Validation results are then ratified by the Risk Committee;
• The Model Validation Bureau, which is responsible for qualitative and quantitative analyses, model validation independent from model development, development of model validation and monitoring methodologies, preparation of reports for the Validation Committee;
• Model Owners and Rating System Owners responsible for the development function which involves the following: new model development, recalibration of existing models, management of factors affecting the use of a model, implementation of Validation Committee recommendations on its own and in cooperation with the IT team.

Reports and recommendations from model monitoring are approved by the Head of the Risk Department.

Reports and recommendations of the Model Validation Bureau are approved by the Validation Committee.

The Chairman of the Validation Committee is obligated to submit to the Risk Committee and, if necessary, to other committees responsible for controlling credit risk, requests from the Validation Committee regarding all the credit risk models and rating systems and the implementation status of corrective action, if any.

The Bank stores the documentation of implemented models, rating systems, monitoring and validation reports and the methodologies used to prepare monitoring and validation reports; minutes on decisions made by the Validation Committee and the Risk Committee.

In addition, the Internal Audit Department shall review rating systems according to the annual Audit Plans approved by the Supervisory Board. These include the credit area, in particular issues of risk parameters estimation: PD, LGD, CCF and expected loss EL. The reviews are carried out based on the Audit Charter and the Audit Manual approved by the Audit Committee of the Supervisory Board. Research is carried out on the basis of specialist audit programs.