Abstract
When developing an internal rating system, besides its calibration, the validation of the respective rating categories and associated probabilities of default plays an important role. To have a valid risk estimate and allocate economic capital efficiently, a credit institution has to be sure of the adequacy of its risk measurement methods and of the estimates for the default probabilities. Additionally, the validation of rating grades is a regulatory requirement to become an internal ratings based approach bank (IRBA bank).
This chapter represents the personal opinions of the authors and cannot be considered as representing the views of the Deutsche Bundesbank, the University of Applied Sciences at Darmstadt or DekaBank.
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Notes
- 1.
Under the settings of the normal approximation of the binomial test in Sect. 14.3.1.2 there is a more than 15%-chance, that the default rate exceeds the PD by more than a standard deviation.
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Blochwitz, S., Martin, M.R.W., Wehn, C.S. (2011). Statistical Approaches to PD Validation. In: Engelmann, B., Rauhmeier, R. (eds) The Basel II Risk Parameters. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-16114-8_14
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