Principles for specifying the range of application of a rating system

7.1 The PRA expects that a'rating system' as defined in Rule 1.3 of the Credit Risk: Internal Ratings Based Approach (CRR) Part should cover all those exposures where the obligors or facilities exhibit common drivers of risk and creditworthiness, and fundamentally comparable availability of credit-related information. The PRA considers that the PD and LGD model within a rating system may comprise various calibration segments. Where all obligors or exposures within the range of application of the PD or LGD model are jointly calibrated, the whole scope of application of the model should be considered to be one calibration segment.

7.2 Exposures covered by the same rating system should be treated similarly by the firm in terms of risk management, decision making and the credit approval process. For exposures to corporates and institutions, such exposures should be assigned to a common obligor rating scale for the purposes of Article 170(1)(b) of the Credit Risk: Internal Ratings Based Approach (CRR) Part and, where LGD is estimated, to a common facility rating scale for the purposes of Article 170(1)(e) of the Credit Risk: Internal Ratings Based Approach (CRR) Part.

7.3 For the purpose of the quantification of the risk parameters within a rating system, firms should, for a given historical observation, apply the same definition of default to the historical observation in all models for which the historical observation is used. Firms should also apply the same treatment of multiple defaults of the same obligor or exposure across internal, external, and pooled data sources.

Multi-country mid-market corporate PD models