Overall assessment

8.1 In accordance with Article 174 of the Credit Risk: Internal Ratings Based Approach (CRR) Part, firms are required to ensure that data used to build a model is representative of its actual exposures. The PRA expects that where external data are used by a firm to build models, it should consider whether the data are appropriate to its own experience and make any adjustments that are necessary.

Representativeness of data for model development

8.2 Firms should analyse the representativeness of data in the case of statistical models and other mechanical methods used to assign exposures to grades or pools, as well as in the case of statistical default prediction models generating default probability estimates for individual obligors or facilities. Firms should select an appropriate data set for the purpose of model development to ensure that the performance of the model on the application portfolio, in particular in respect of the model's discriminatory power, is not significantly hindered by insufficient representativeness of the data.

8.3 For the purposes of ensuring that the data used in developing the model for assigning obligors or exposures to grades or pools are representative of the application portfolio covered by the relevant model, as required in Article 174(c) of the Credit Risk: Internal Ratings Based Approach (CRR) Part, firms should analyse the representativeness of the data at the stage of model development in terms of all of the following:

(a) the scope of application; (b) the definition of default;

(c) the distribution of the relevant risk characteristics; and