The CBRC Launched the Guidelines on the Validation of Advanced Capital Measurement

 Methodology of Commercial Banks

To promote the implementation of Basal II, strengthen the risk management of commercial banks, the CBRC has launched The Guidelines on the Validation of Advanced Capital Measurement Methodology of Commercial Banks (hereinafter referred to as the Guidelines). The Guidelines together with the other guidelines set up the framework for China’s commercial banks to implement the three pillars under Basel II.

Based on the relevant requirements of Basel II, the Guidelines absorbed the practical experiences from other countries and jurisdictions. Meanwhile, with the view of ensuring the full coverage of risks during the process of capital measurement, the Guidelinesfully took into account the reality faced by the domestic banking industry and clearly specified the standards for the commercial banks to establish their validation systems.

The Guidelines have 7 chapters and 153 items in total, which cover the validation of market risk internal model and operational risk advanced measurement system, as well as the supervision and examination etc.     

The first chapter General Rules clearly defined the range of appliances, general requirements and the supervision responsibility of the regulators. The second chapter laid out the general requirements for the validation work of the commercial banks, clarifying the aim, scope and focus points of varied phases of validation, meanwhile underling the independence of the each bank.

The third chapter is about the validation of credit risk internal rating system. It specified the varied focus points of different phases and the validation requirements for data, rating model, PD, LGD, EAD, IT system, policies and process.

The fourth chapter the validation of market risk internal model provides the specific validation requirements of internal model input data, assumptions, parameters, as well as calculation, output and reporting process of the internal model.

The fifth chapter is about the validation of the operational risk advanced measurement system. Apart from emphasizing the different validation priorities during varied phases, it also stipulated the validation procedures and the validation requirements of the policies of the advanced measurement system, data and model. The sixth chapter the supervision and examination of validation clarified the responsibilities and supervision measures of the regulators. The seventh chapter is the Annex, in which the right of interpretation, effective date and the validation requirements of the capital calculation model established before the launch of this Guidelines and its supporting system are clearly defined.

Relevant official from the CBRC said that the first batch of banks that are about to implement Basel II and the banks that are willing to implement Basel II on a voluntarily basis have now already finished the development of their major measurement models. Consequently, the risk management technology of the above mentioned banks have been changed dramatically, and the results produced by the models have been applied to credit approval, loan pricing, provision drawing up and supervision capital measurement etc. However, in terms of the validation of the models lots of effort is still needed.

At the moment, all the involved banks are building their validation systems. As the regulator, we will guide the banks through the whole process to enhance the stability, reliability and risk prediction ability of the advanced measurement method, and to further promote the improvement of the method and the system.