For improving the credit risk management of members, CRD Association provides a simple internal rating validation service.
In this service, CRD Association uses its model to evaluate the internal rating system of members to ensure it is constructed and managed properly. In internal rating systems, it is important that each rating is ranked accurately and grouped according to the credit risk of borrowers. Rating mapping analysis compares the evaluations by the internal rating systems of members and those by the CRD model. As part of the comparison, the accuracy of the internal rating models of CRD members is checked. Furthermore, several reports investigating the internal rating models are provided.
The CRD rank comprises 10 ranks that divide the financial statements of borrowers in the CRD by the predicted probability of default estimated by the CRD model. The CRD rank lies between 1 (low risk) and 10 (high risk) and is updated each year.
By comparing ratings in the previous term and those in the current term, and identifying any changes of ratings, CRD Association validates the stability and accuracy of the rating system.
By validating rating models in a comparison with the CRD model, CRD Association offers not only relative validations of credit-rating systems, but also helps members understand the characteristics of rating models.
If members provide sufficient client data, CRD Association can estimate AR values for the financial rating, temporal rating, and final rating.
To reconstruct a credit-rating system, it is necessary to check the current credit-rating system, credit-rating process, and extraction and summarization of current problems.
Based on the results of the extraction and summarization, this service considers the direction of reconstruction for an optimal credit-rating system using the following steps.
Development of database
- Validation of accuracy of internal rating model
- Validation of results of internal rating
- Validation of framework of an internal rating system
- Adjustment of the evaluation model for financial statements
- Reconsideration of a part of the internal-rating framework
- Reconsideration of quantitative and qualitative evaluations
- Reconsideration of combination of evaluations
- Reconstruction of framework of internal rating system