Question ID:
Legal Act:
Regulation (EU) No 575/2013 (CRR)
Credit risk
1, 2
COM Delegated or Implementing Acts/RTS/ITS/GLs/Recommendations:
EBA/GL/2017/16 - Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures
Section 5.3.5 - paragraph 88
Disclose name of institution / entity:
Type of submitter:
Credit institution
Subject Matter:
PD Calibration Sample

Given the definition of PD calibration provided in EBA/GL/2017/16 section 2.4 paragraph 8, and the requirements for the calibration sample provided in section 5.3.5, paragraph 88 of the same guidelines, for developing a Through-the-Cycle (TTC) model, under which conditions it is mandatory to adopt the current portfolio or a multi-year snapshots as calibration sample? And consequently should the calibration testing in validation phase verify the alignment between the Central Tendency and the PD estimations on recent portfolio snapshot or multiyear sample?

Background on the question:

EBA guidelines on PD estimation, LGD estimation and treatment of defaulted exposures (EBA/GL/2017/16) in section 2.4, paragraph 8 define the “PD calibration” as " The part of the process of the estimation of risk parameters which leads to appropriate risk quantification by ensuring that when the PD ranking or pooling method is applied to a calibration sample, the resulting PD estimates correspond to the long-run average default rate at the level relevant for the applied method". Furthemore the same paragraph defines the “PD calibration sample” as “The data set on which the ranking or pooling method is applied in order to perform the calibration.” Therefore the calibration sample is generically defined as “a data set” without qualifying if it should be a recent single snapshot portfolio or a multiyear sample. Subsequently, according to section 5.3.5, paragraph 88 of the same guidelines states that “In order to ensure compliance with Article 180(1)(a) or 180(2)(a) of Regulation (EU) No 575/2013, institutions should find an appropriate balance between the comparability of the calibration sample with the application portfolio in terms of obligor and transaction characteristics and its representativeness of the likely range of variability of default rates as referred to in section 5.3.4.”. Thus the calibration sample must be chosen in order to have an “appropriate balance” between its comparability with the application portfolio (that might  be interpreted as a representativeness with obligor and transactions characteristics, as recalled in point c) of section 4.2.4. par. 28 as well as representativeness of the current riskiness) and its representativeness of the likely range of variability of default rates as for the Long run default rates (due to the reference to section 5.3.4) where a multiyear perspective would be required in order to observed a variability of 1-year default rate. As a consequence of this it is not clear to us if this paragraph requires mandatorily to adopt a calibration sample covering multi yearly snapshots (choosing nevertheless a calibration sample which guarantees the representativeness of the current obligors characteristics), or if the use of the current portfolio as calibration sample is preferred for a TTC model, and always allowed, in order to ensure to have current PD estimates corresponding to the long-run average default rate, at the level relevant for the applied calibration method.

In particular, the extract at page 24-25 (supporting the explanation provided in table 1, page 25 of EBA/GL/2017/16 on the possibility to adopt "TTC B" calibration philosophy) is not clear to us, and we would need a better clarification on the meaning of this specific extract : " This would be an example of a ‘TTC B’ calibration, as indicated in Table 1, and would be applicable for own funds requirements calculation if all other requirements are met, in particular those on the calibration sample (the chosen point in time would need to reflect a sample comparable to the current portfolio and representative of the likely range of variability of one-year default rates).". It is critical to understand how the chosen point in time is representative of the likely range of variability of one year default rate considering that the PD estimates after calibration would be determined conditioned to the type of calibration sample defined. A clarification on this topic is relevant in order to define the approach for rating dynamics measurement and interpretability of calibration test outcomes within the validation phase.

Date of submission:
Published as Rejected Q&A
Rationale for rejection:

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Rejected question