The Financial Supervisory Authority of Norway has published an on-site inspection report on DNB Bank ASA’s use of internal ratings-based (IRB) models for calculating credit risk capital requirements. The review covered the bank’s IRB model framework, use of the IRB system in selected credit cases, and the bank’s validation reports and routines, and sets out supervisory expectations on governance, calibration, validation and the maturity parameter used in corporate risk weights. DNB has permission to use the IRB approach and reported having 32 IRB models across mortgages, unsecured credit, asset finance, small and medium-sized enterprises (SME) and large corporate segments, with just under 70% of total lending reported under IRB. The report reiterates board accountability for ensuring IRB compliance and the independence of control functions, and points to the need to build quality assurance of impact calculations into routines for assessing the materiality of model changes. On calibration and validation, it stresses that probability of default (PD) estimates must at all times reflect long-run default rates, and maintains that acceptance criteria for deviations between observed default rates and PD at risk-class level are needed, including supplementary calibration tests for portfolios with limited class-level data and time-series views of PD levels and central tendency. For loss given default (LGD), it highlights complexity and error risk in the bank’s process for calculating observed LGD and expects the process to be established and documented, with updated methods that better address uncertainty from incomplete economic cycle data, including more granular recovery information and prudent treatment of recoveries from unresolved defaults. The authority also challenges the bank’s approach to the maturity parameter (M) amid falling maturities in several portfolios, calling for quantitative analyses over at least the last five years to support that maturities are not understated, and expects more transparent and consistent presentation of IRB risk parameters in credit decision documentation. Finanstilsynet requests a status update on the bank’s SME LGD models, including how unresolved defaults are handled in validation, by 30 April 2025. Follow-up of the maturity-parameter practice is expected through ongoing IRB supervision and the annual assessment of capital needs under Pillar 2.
Norwegian Finanstilsynet 2025-02-14
Financial Supervisory Authority of Norway publishes DNB Bank IRB inspection findings on model validation and maturity parameter use
Norway's Financial Supervisory Authority released an inspection report on DNB Bank ASA's use of internal ratings-based (IRB) models for credit risk capital requirements. It emphasizes board accountability for IRB compliance, quality assurance in impact calculations, and accurate calibration and validation of probability of default (PD) and loss given default (LGD) estimates. The report also calls for quantitative analyses of the maturity parameter and expects transparent presentation of IRB risk parameters in credit documentation.