On 28 July 2022, the European Banking Authority (EBA) published a Consultation Paper on its supervisory handbook for the validation of internal ratings based systems. This handbook clarifies the role of the validation function as part of corporate governance, in particular in terms of scope of work and interaction with the credit risk control unit.

The handbook does not present any specific methodology to be used by the validation function. Instead, the handbook specifies which elements of institutions’ rating systems are expected to be assessed by the validation function.

Furthermore, the handbook provides a set of expectations and good practices on the work of the validation function depending on its position in the model cycle (i.e. first or subsequent validation), as well as some additional guidance for the validation of rating systems when using external data, when outsourcing some validation tasks, as well as in a situation of data scarcity.

The supervisory handbook, just like the EBA guidelines, is of non-binding nature. However, unlike guidelines, the supervisory handbook is not addressed directly to financial institutions but to competent authorities, and does not limit their judgment-led supervision.

Responses to the consultation can be sent directly to the EBA and the consultation will run until 28 October 2022. A public hearing will take place via conference call on 4 October 2022. The deadline for registration for this is 3 October 2022.