Regulatory Alerts2021-06-09
Requirements for IRB Models in Banks, Credit Institutions and Finance Companies
The Norwegian Financial Supervisory Authority (Finanstilsynet) issued this circular to clarify regulatory requirements for Internal Ratings-Based (IRB) models used by banks, credit institutions, and finance companies to calculate capital requirements for credit risk. The document mandates that IRB systems must reflect long-term outcomes and downturn scenarios, requiring specific data history, rigorous validation, and the application of safety margins to address estimation uncertainty. It establishes strict criteria for Probability of Default (PD) and Loss Given Default (LGD) modeling, including a mandatory reference model for mortgage loans and specific thresholds for portfolio size and significant model changes.
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