Given the requirements of articles 175(4)(b) and 179(1)(a) , in case of a model development, should the last available one-year snapshot be used for risk quantification purposes (i.e. for the computation of the Long-run average default rate) or be set aside for validation tests?
Articles 179(1)(a) requires that “an institution's own estimates of the risk parameters PD, LGD, conversion factor and EL shall incorporate all relevant data, information and methods” on the other hand article 175(4)(b) requires out-of-time and out-of-sample performance tests for validating the model. While in the risk differentiation phase the presence of an out-of-time validation sample can be guaranteed, in the context of initial validation, it is not clear if the last available snapshot should be used for calibration purposes (i.e. should be part of both long run average default rate computation sample and calibration sample) or if it should be set aside for the out-of-time performance test. Moreover it is not clear whether a partial overlap of the validation and calibration sample would satisfy the requirement of article 175(4)(b).
Please note that as part of adjustments to the Single Rulebook Q&A process, agreed by the EBA and the European Commission, it has been decided to reject outstanding questions submitted before 1 January 2020, when the Q&A process was updated as part of the last ESAs Review. In particular, the question that you have submitted has now regrettably been rejected and will not be addressed.
If you believe your question would still benefit from clarification, you are invited to resubmit your question, adapting it to reflect any legislative, regulatory or other relevant developments that may have occurred since the initial date of submission. The EBA will aim to address resubmitted questions as a matter of priority. When considering to resubmit, you are kindly requested to observe the updated admissibility criteria agreed in the context of the adjustment of the Q&A process, available in the Additional background and guidance for asking questions. We hope for your understanding.