The document summarizes the findings of a survey on internal ratings-based (IRB) validation practices among banks. Key findings include: - Banks use a wide range of techniques to validate internal ratings, including statistical models, expert judgment, and hybrid/vendor models. Approaches differ between corporate and retail asset classes. - Expert judgment is essential due to lack of default data for some asset classes. Regional differences also exist in validation approaches. - Data quantity is a larger issue than quality for validation. More guidance is needed on stress testing requirements and validation of expert judgment ratings.

1. Results of BBA/ISDA/RMA IRB Validation Study BBA/ISDA/RMA Advanced IRB Forum Monika Mars London - June 23, 2003

3. Survey Approach Survey research and design Data collection, and analysis Report preparation Report presentation Interviews Jan – Feb 2003 June 19/23 Feb – Mar 2003 1 st Draft Mid March 2003 Final Report Draft – early May 4 th Quarter 2002

4. Survey responses covered all asset classes representing a diverse group of institutions

6. Internal ratings are key to managing the business at most firms

7. Most banks use “Master Scales” to compare ratings information across portfolios

12. A variety of model types are employed within each asset class 5 7 10 Hybrid 17 2 7 External Vendor 8 11 15 Expert Judgement 23 4 7 Statistical Retail Middle Market Corporate Model Type

16. The performance of statistical rating models is achieved through a number of different techniques

17. Different triggers are used to evaluate the overall performance of expert judgement rating models

18. A variety of techniques are employed for evaluating vendor models