Documentation & Reporting

Standards for Methodology Documents and Validation Reports

Documentation Standards

Comprehensive documentation is a fundamental regulatory requirement under IFRS 9. It provides auditors, regulators, and stakeholders with the necessary transparency to understand, challenge, and replicate the Expected Credit Loss (ECL) results.

Regulatory Note: Internal Audit and External Regulators (e.g., EBA, PRA) expect documentation to be "self-contained," meaning a qualified third party should be able to rebuild the model using only the provided documents.

Model Methodology Document

The "Model Design Bible." It explains the why and how of the ECL model construction.

Key Sections:
  • Executive Summary: High-level overview of model purpose, scope, and total ECL impact.
  • Theoretical Basis: Justification for the chosen mathematical approach (e.g., Logistic Regression for PD, Discounted Cash Flow for LGD).
  • Segmentation Logic: Rationale for grouping portfolios (e.g., Retail vs. Wholesale) and statistical evidence of homogeneity.
  • Parameter Calibration: Detailed derivation of PD, LGD, and EAD, including historical look-back periods and smoothing techniques.
  • Forward-Looking Information: Description of the macroeconomic model and how scenarios (Upside, Base, Downside) are probability-weighted.
  • Assumptions & Limitations: Explicit listing of all expert judgments and known model weaknesses.

Model Validation Report

Issued by an independent party, this document provides a critical review of the model's performance and compliance.

Conceptual Soundness

Review of whether the model logic aligns with IFRS 9 requirements and industry best practices.

Outcome Analysis

Summary of Backtesting results (Binomial tests), Stability checks (PSI), and Sensitivity analysis.

Reporting Requirements:
  • Comparison: Predicted vs. Actual outcomes for at least 3 years.
  • Model Limitations: List of "Findings" categorized by severity (High, Medium, Low).
  • Management Action Plan: How the development team plans to address the validator's findings.

Data Dictionary & Lineage

Documentation of the data "Golden Source" and all transformations performed before calculation.

Field Source System Transformation Logic
Rating Credit Risk System Mapped to Internal Master Scale
EAD Core Banking Drawn + (Undrawn * CCF)

Final Submission Checklist

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