BCBS releases document on backtesting credit risk models

14 December 2010

The Basel Committee on Banking Supervision has released a document detailing sound practices for backtesting counterparty credit risk models.

The BCBS released the paper tittled "Sound Practices for Backtesting Counterparty Credit Risk Models," based on an earlier consultative document opened up for public comment. 

The guidance sets out supervisory expectations, as well as recommendations to strengthen the backtesting of internal assessments of counterparty credit risk exposures.  

Banks that have received supervisory permission to use internal model methods to calculate regulatory capital are required to validate their models on an ongoing basis. Backtesting is an integral element of the model validation process and the financial crisis has revealed that additional guidance in this area is required. The Committee believes that implementation of these sound practices will improve the backtesting of banks' models and, as a result, will enhance the resilience of individual banks and the financial system.

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