The majority of institutions employ models to estimate the probability of default of their obligors (or facilities), for risk management purpose and to comply with accounting and regulatory requirements. These models are generally referred to as ‘PD models’, although this broad definition covers several types of models. For the purpose of the MMG, and to ensure appropriate model management, the following components should be considered as separate models:
(i)
Rating-to-PD mapping models, and
(ii)
Point-in-Time PD Term Structure models.
3.1.2
These models have implications for key decisions including, but not limited to, risk management, provisioning, pricing, capital allocation and Pillar II capital assessment. Institutions should manage these models through a complete life-cycle process in line with the requirements articulated in the MMS. In particular, the development, ownership and validation process should be clearly organised and documented.