International & EU

 

Our over-riding philosophy towards firms considering advanced approaches has been: 'no compulsion, no prohibition'. This remains the case. It is for the management of a firm to decide whether to apply.

For our part we will review applications received to determine whether or not they reach the required standard for approval.

Over the past months we have seen a number of firms deferring their planned application dates. We see this as a positive signal that applicants are taking the process seriously. It is preferable that a firm puts its application in only when it is satisfied that it can demonstrate to us that it meets the criteria for approval, rather than sticking to a perhaps over-optimistic timetable.

We are actively planning our waiver review schedule for the rest of 2006 and for 2007. The demands on our resources are such that there will be little, if any, scope to change visit dates once they are agreed after a formal application has been received. Similarly, returning to a firm to check if a significant issue has been addressed is unlikely to be possible until after June 2007.

This reinforces the need for firms to be prepared when they submit formal applications. In particular, firms should review their state of readiness in the following areas before applying:

  • Self assessment - We are looking for firms to be open with us about any weaknesses in their models and how they will be addressed. If we come across significant weaknesses that the firm has not highlighted, it leaves us in doubt as to the firm's grip on the application.
  • Documentation - Documentation is important to support the governance and maintenance of the rating systems. It also provides essential background information to our teams in advance of the on-site visits.
  • Validation - Firms must define validation standards as required in BIPRU 4.3.28. In particular, standards of calibration and discriminative power should be set out, along with remedial actions to be taken in the event that the validation standards cease to be met.
  • Use Test - We are seeing progress in this area, especially in meeting the use test on credit approval. We recognise that this is likely to evolve and will be taking into account the general attitude, intent and commitment of the firm.
  • Senior management understanding - We expect senior management to be fully engaged in the implementation process and to be able to explain to us the nature of their involvement. BIPRU 4.3.9 and 4.3.11 require members of a firm's governing body to have a general understanding of the rating systems, and senior management to have a good understanding. Firms should consider what this means to them.
  • Stress testing - We wish to see firms making some progress in this area in response to our further guidance in CP06/03 and PS06/6. We are carrying out a thematic review on stress testing and will be issuing a Dear CEO letter at the end of September 2006 (please note that this work is focusing on stress testing generally and is not specific to CRD implementation).
  • Downturn LGDs - We are expecting and seeing firms making progress in assessing downturn LGDs; we are also undertaking some work to increase our own understanding.

In submitting an application, firms should also be aware of the following administrative arrangements, which are designed to allow us to deal with their application efficiently:

  • firms should be able to supply documentation on its rating systems electronically within one week of our request;
  • if we request information which requires special preparation (for example ad hoc analysis), we expect firms to provide this within a reasonable timescale not exceeding one month. However, we expect to make such requests only in a small number of cases;
  • we expect key personnel to be available for meetings within three weeks of our invitation. In most cases supervisors will aim to book meetings in advance of receiving the application pack.