Overview of Central Banks' In-House Credit Assessment Systems in The Euro Area

Overview of central banks’
in-house credit assessment 2021

systems in the euro area
Documentos Ocasionales
N.º 2131
Laura Auria, Markus Bingmer, Carlos Mateo

Caicedo Graciano, Clémence Charavel, Sergio Gavilá,
Alessandra Iannamorelli, Aviram Levy, Alfredo Maldonado,
Florian Resch, Anna Maria Rossi and Stephan Sauer
Overview of central banks’ in-house credit assessment systems
in the euro area
Overview of central banks’ in-house credit
assessment systems in the euro area
Laura Auria
Deutsche Bundesbank
Markus Bingmer
Deutsche Bundesbank
Carlos Mateo Caicedo Graciano

Banque de France
Clémence Charavel
Banque de France
Sergio Gavilá
Banco de España
Alessandra Iannamorelli
Banca d’Italia
Aviram Levy
Banca d’Italia
Alfredo Maldonado
Banco de España
Florian Resch
Oesterreichische Nationalbank
Anna Maria Rossi

Banca d’Italia
Stephan Sauer
European Central Bank
This paper has also been published as an ECB Occasional Paper with number 284, October 2021.
Documentos Ocasionales. N.º 2131

November 2021
The Occasional Paper Series seeks to disseminate work conducted at the Banco de España, in the
performance of its functions, that may be of general interest.
The opinions and analyses in the Occasional Paper Series are the responsibility of the authors and, therefore,
do not necessarily coincide with those of the Banco de España or the Eurosystem.
The Banco de España disseminates its main reports and most of its publications via the Internet on its
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Reproduction for educational and non-commercial purposes is permitted provided that the source is
acknowledged.
© BANCO DE ESPAÑA, Madrid, 2021
ISSN: 1696-2230 (on-line edition)

Abstract
The in-house credit assessment systems (ICASs) developed by euro area national central
banks (NCBs) are an important source of credit risk assessment within the Eurosystem
collateral framework. They allow counterparties to mobilise as collateral the loans (credit
claims) granted to non-financial corporations (NFCs). In this way, ICASs increase the usability
of non-marketable credit claims that are normally not accepted as collateral in private
market repo transactions, especially for small and medium-sized banks that lend primarily
to small and medium-sized enterprises (SMEs). This ultimately leads not only to a widened
collateral base and an improved transmission mechanism of monetary policy, but also to a
lower reliance on external sources of credit risk assessment such as rating agencies. The
importance of ICASs is exemplified by the collateral easing measures adopted in April 2020
in response to the coronavirus (COVID-19) crisis. The measures supported the greater use
of credit claim collateral and, indirectly, increased the prevalence of ICASs as a source of
collateral assessment.
This paper analyses in detail the role of ICASs in the context of the Eurosystem’s credit
operations, describing the relevant Eurosystem guidelines and requirements in terms of,
among other factors, the estimation of default probabilities, the role of statistical models
versus expert analysis, input data, validation analysis and performance monitoring. It then
presents the main features of each of the ICASs currently accepted by the Eurosystem as
credit assessment systems, highlighting similarities and differences.
Keywords: credit assessments, credit risk models, credit claims, ratings, ICAS.
JEL classification: E58.

Resumen
Los sistemas de evaluación del crédito desarrollados internamente por los bancos centrales
nacionales (ICAS) son una fuente importante de valoración del riesgo de crédito dentro
del marco de los activos de garantía de política monetaria del Eurosistema. En particular,
los ICAS permiten que las entidades financieras aporten los préstamos concedidos a
sociedades no financieras como garantía en las operaciones crediticias en las que se
instrumenta la política monetaria del Eurosistema. En este sentido, los ICAS contribuyen
a que los préstamos puedan ser utilizados como colateral, dado que generalmente no
son aceptados como tal en la operativa privada de repos, y benefician potencialmente en
mayor medida a los bancos de tamaño mediano o pequeño que financian a las pymes. Esto
último conduce no solo a una ampliación del conjunto de activos de garantía disponibles
en las entidades financieras y a una mejora del mecanismo de transmisión de la política
monetaria, sino también a una menor dependencia de fuentes externas de valoración del
riesgo de crédito, como las agencias externas de calificación. La importancia de los ICAS
se ha puesto de manifiesto en las medidas aprobadas por el Eurosistema en abril de 2020
en respuesta a la crisis del COVID-19. Dichas medidas apoyaron un mayor uso de los
préstamos como activos de garantía e, indirectamente, incrementaron la importancia de
los ICAS como fuente de valoración del colateral.
Este documento analiza en detalle el papel de los ICAS en el contexto de las operaciones
crediticias de política monetaria del Eurosistema, describiendo las guías y los requerimientos
más relevantes exigidos a los ICAS en términos, entre otros factores, de la estimación
de las probabilidades de impago, el papel de los modelos estadísticos frente al análisis
experto, la información utilizada en el proceso de evaluación y la validación periódica de
su funcionamiento. Adicionalmente, describe los principales aspectos de cada uno de los
ICAS actualmente aceptados como sistema de calificación por el Eurosistema, destacando
tanto sus elementos comunes como los diferenciales.
Palabras clave: sistema interno de evaluación del crédito (ICAS), sociedades no financieras,
préstamos, activos de garantía, política monetaria.
Códigos JEL: E58.

Contents
Abstract 5
Resumen 6
Non-technical summary 8
1 Introduction 10
2 ICASs in the context of the Eurosystem’s monetary policy operations 13
2.1 Credit claims as eligible collateral for the Eurosystem’s credit operations 13
2.2 Evaluating credit quality with the ECAF 15
2.3 Historical evolution of ICASs 17
Box 1 ICASs and the ECB’s response to the COVID-19 pandemic 20
2.4 ICASs’ portfolio composition and relative usage 23
3 The Eurosystem’s guidelines for ICASs 25
3.1 Overview of the system 25

3.2 Credit risk measures: default probability and risk classes 26
3.3 Rating process 26
3.4 Key risk factors 27
3.5 Data sources 28
3.6 Default definition 28
3.7 IT system architecture 29
3.8 Monitoring and internal validation 29
3.9 ECAF validation and monitoring 30
4 National ICASs – features and cross-comparison 31
Box 2 ESG factors and ICAS ratings 33
5 Conclusion 34
Annex – Features of national ICASs 35

A.1 Oesterreichische Nationalbank (OeNB) 35
A.2
Deutsche Bundesbank (BBk) 37
A.3 Banco de España (BdE) 40
A.4 Banque de France (BdF) 42
A.5 Banca d’Italia (BdI) 46
A.6 Banco de Portugal (BdP) 48
A.7 Banka Slovenije (BS) 52
References 55
Non-technical summary
The ICASs of Eurosystem NCBs are one of three sources of assessments of

collateral credit risk within the Eurosystem monetary policy framework. However,
they play a special role in that they provide credit quality assessments for NFCs of all
sizes and from all industries, which in most cases are not assessed by other credit
assessment systems available to the Eurosystem’s monetary policy counterparties.
ICASs therefore make it easier for banks to mobilise loans to NFCs as collateral.
Since all Eurosystem lending has to be based on adequate collateral, ICASs

contribute to the availability of sufficient collateral and a smooth implementation of
monetary policy. ICASs therefore help to reduce the Eurosystem’s reliance on rating
agencies for bank loans and contribute to a more diversified collateral composition.
The acceptance of illiquid bank loans also leads to certain side effects, including
operational challenges and risks for the Eurosystem. Various eligibility and use
requirements as well as risk control measures aim to ensure that these bank loans
are treated in an equivalent manner to other eligible assets from the perspective of
the Eurosystem's risk exposure. They thus contribute to a risk-efficient
implementation of monetary policy.
The contribution of ICASs to monetary policy implementation becomes even more

important in times of market tension, as exemplified by the Eurosystem’s response to
the COVID-19 crisis. The Eurosystem measures adopted in March and April 2020 in
order to support bank funding were followed by a significant increase in the
mobilised collateral assessed by ICASs.
ICAS credit quality assessments have also proven useful beyond monetary policy:
ICAS ratings are used for financial stability analyses, for economic research and for
macroprudential and microprudential supervision. They provide benchmarks for
banks’ internal ratings-based (IRB) systems and guidance for estimating allowances
and provisions for credit risk losses, among other purposes.
The quality and reliability of ICAS credit assessments are ensured through a
common set of Eurosystem-wide rules. These have to be followed by any NCB
deciding to operate an ICAS, both in the initial acceptance phase and once the
system is in regular usage. ICASs have to comply with certain standards in terms of
organisation, adequate resources and governance. A key tool for the regular due
diligence of ICASs is the annual Eurosystem “performance monitoring process”.
The assessment of credit quality has always been important for collateral purposes.
This was the case even before the creation of the Economic and Monetary Union
(EMU). Four euro area members already had an ICAS before 1999 and kept using it
after the adoption of the euro: first in the period in which a two-tier system for
collateral was in place, in order to allow a smooth transition from the national
frameworks, and subsequently under the unified collateral framework (“single list”)
adopted in 2007. Other ICASs were set up after the sovereign debt crisis of 2012, in
order to increase collateral availability and facilitate the temporary framework for
“additional credit claims” (ACCs) adopted by several Eurosystem NCBs at the time.
Additional Eurosystem central banks may develop ICASs in the coming years. The
introduction of Paper
ECB Occasional AnaCredit
Seriesin
No2018
284 / overcame a major obstacle for the development of4
October 2021
credit risk models by central banks that previously lacked a credit register.
BANCO DE ESPAÑA 8 DOCUMENTO OCASIONAL N.º 2131
Although all ICASs must comply with the commonly agreed requirements, they vary
slightly in terms of specific procedure and implementation, such as their statistical
methodologies. ICASs also differ in terms of (i) “users”, with some central banks
order to increase collateral availability and facilitate the temporary framework for
“additional credit claims” (ACCs) adopted by several Eurosystem NCBs at the time.
Additional Eurosystem central banks may develop ICASs in the coming years. The
introduction of AnaCredit in 2018 overcame a major obstacle for the development of
credit risk models by central banks that previously lacked a credit register.
Although all ICASs must comply with the commonly agreed requirements, they vary
slightly in terms of specific procedure and implementation, such as their statistical
methodologies. ICASs also differ in terms of (i) “users”, with some central banks
additionally using ICAS ratings for macroprudential and microprudential purposes,
including in one case microprudential capital requirements; and (ii) internal
organisation, with some NCBs conducting their ICAS activity within the scope of
market operations and others as part of statistical or other functions.
ICASs already include some relevant and available environmental, social and
governance (ESG) indicators in their rating process. The Eurosystem is working
towards greater integration of ESG factors, in particular factors related to climate
change risks, in the ICAS methodologies.
This paper thus describes in detail the role of ICASs in the context of the
Eurosystem’s credit operations. It analyses the Eurosystem guidelines and
requirements to which national ICASs must adhere in terms of, among other factors,
the measurement of default probabilities, the role of statistical models versus expert
analysis, input data, validation analysis and performance monitoring. It also provides
a detailed description of each of the seven ICASs currently accepted by the
Eurosystem, with an overview of their main features that highlights similarities and
differences.
ECB Occasional Paper Series No 284 / October 2021 5

1 Introduction
1 Introduction
The collateral framework is one of the pillars supporting the Eurosystem’s monetary 1
policy implementation. It consists of a set of rules and requirements – eligibility

criteria, minimum credit quality, haircuts, etc. – that financial assets have to satisfy in
The collateral framework is one of the pillars supporting the Eurosystem’s 1 monetary
order to be used to secure refinancing operations. 2 Although once called the “open
policy implementation. It consists of a set of rules and requirements – eligibility
secret of central banks” (Nyborg, 2016), an increasing number of papers and books
criteria, minimum credit quality, haircuts, etc. – that financial assets have to satisfy in
have investigated various aspects of the Eurosystem collateral framework. 3
order to be used to secure refinancing operations. 2 Although once called the “open
secret of central
Nevertheless, banks”
this is the (Nyborg, 2016),
first paper an increasing
to provide number ofoverview
a comprehensive papers and books
of the
have investigated
entities that conductvarious aspects of the Eurosystem
Eurosystem-internal collateralofframework.
credit assessments 3
a non-negligible part
of non-marketable collateral: the ICASs operated by NCBs in the euro area. 4
Nevertheless, this is the first paper to provide a comprehensive overview of the
entities
The that conduct
collateral Eurosystem-internal
framework credit
is meant to protect theassessments
Eurosystem’sofbalance
a non-negligible part
sheet against
of non-marketable
losses collateral:
related to the default ofthe ICASs operated
a monetary by NCBs in the
policy counterparty. euroimplements
It thus area. 4
the
statutory requirement to base all lending on adequate collateral. 5 At the same time,
The collateral framework is meant to protect the Eurosystem’s balance sheet against
the collateral framework ensures that sufficient collateral is available to smoothly
losses related to the default of a monetary policy counterparty. It thus implements the
implement monetary policy and to provide a level playing field, across jurisdictions,
statutory requirement to base all lending on adequate collateral. 5 At the same time,
for counterparties in need of liquidity when they mobilise financial assets as
the collateral framework ensures that sufficient collateral is available to smoothly
collateral.
implement monetary policy and to provide a level playing field, across jurisdictions,
forkey
A counterparties
requirementinofneed of liquidity
the collateral when they
framework is mobilise financial
a high credit assets
quality asassets to
of the
collateral.
be mobilised. In this context, the Eurosystem credit assessment framework (ECAF)
defines the procedures, rules and techniques which ensure that all assets eligible for
A key requirement of the collateral framework is a high credit quality of the assets to
monetary policy operations meet the Eurosystem’s credit quality requirements. The
be mobilised. In this context, the Eurosystem credit assessment framework (ECAF)
ECAF is thus the basis for the credit quality assessment of assets mobilised as
defines the procedures, rules and techniques which ensure that all assets eligible for
collateral in Eurosystem credit operations and of assets purchased under the current
monetary policy operations meet the Eurosystem’s credit quality requirements. The
purchase programmes.
ECAF is thus the basis for the credit quality assessment of assets mobilised as
collateral
At present,in to
Eurosystem
assess thecredit
creditoperations and of assets
quality of eligible assets,purchased under takes
the Eurosystem the current
into
purchaseinformation
account programmes.
from credit assessment systems belonging to three categories:
(1) credit rating agencies accepted as external credit assessment institutions
At present, to assess the credit quality of eligible assets, the Eurosystem takes into
(ECAIs), (2) NCBs’ ICASs, and (3) counterparties’ IRB systems that are accepted for
account information from credit assessment systems belonging to three categories:
determining banks’ regulatory capital requirements. 6
(1) credit rating agencies accepted as external credit assessment institutions
(ECAIs),
ICASs (2)aNCBs’
play specialICASs,
role inand
the (3)
ECAFcounterparties’ IRBthat
due to the fact systems that are
they allow accepted for
counterparties
determining
to
1 mobilise banks’
as
The Eurosystem regulatory
collateral
comprisesthe capital
theloans
ECB and requirements.
(also
the called central
national
6
“creditbanks
claims”) granted
of those tothat
countries NFCs,
have
adopted
which the euro.
in many The Eurosystem
cases and the European
are not assessed by other System
credit of assessment
Central Banks will co-exist as
systems long as
available
there are EU Member States outside the euro area.
to
2 these counterparties. ICASs are used in particular by small and medium-sized
Guideline (ECB/2014/60) with subsequent amendments lays down the Eurosystem’s existing general
1 The
banks Eurosystem
that
framework lend comprises
primarily
for monetary theSMEs
to
policy ECB and but thedo
implementation, national central
not have
including banks
an
also theIRB ofsystem
thoseframework.
collateral countries
and arethat
The have
not in a
adopted the euro.
Eurosystem Thefurther
also has Eurosystem and the
non-public European System
specifications and rules offor
Central
ICASs. Banks will co-exist as long as
position to fund
there are themselves
EU Member by issuing
States outside the euroasset-backed
area. securities (ABSs) or covered
3
These include BIS (2013), Bindseil (2014), Bindseil and Papadia (2006), Bindseil et al. (2009, 2017),
bonds.
2
Cheun et al. (2009), ECB (2006, 2011, 2015), and Tamura and a
Moreover,
Guideline ECAI
(ECB/2014/60) ratings
with are
subsequent available
amendmentsonly for
lays down small sharefrom
the Eurosystem’s
Tabakis (2013) of the
NFCs,
existingwhile
centralgeneral
banking
framework for
operational monetary policy
perspective, and implementation,
Calza et al. (2021),including
and also theetcollateral
Mésonnier al. framework.
(2017), from a Theacademic
more
theyEurosystem
are usually not available for SMEs.
also has further non-public specifications and rules for ICASs.
perspective.
3
4 Theseforinclude
See, BISAntunes
example, (2013), Bindseil (2014),
et al. (2016), BindseilBundesbank
Deutsche and Papadia(2015),
(2006),Giovannelli
Bindseil et et
al.al.
(2009, 2017),
(2020),
Already
Cheun inetnormal
Schirmer (2014), times,
al. (2009),
Wukovits the
ECB (2006, acceptance
(2016),2011, of Tamura
2015), and
for descriptions ICASs thus
and
of individual contributes
Tabakis
NCBs’ to the
(2013) from
ICASs. sufficient
central banking
operational perspective, and Calza et al. (2021), and Mésonnier et al. (2017), from a more academic
collateral
5 availability
See Article
perspective.
18.1 of thefor a wide
Protocol range
on the of of
Statute counterparties
the European System with of
different business
Central Banks and of the
European Central Bank.
models
4 and
See, for operating
example, in different
Antunes markets,
et al. (2016), Deutscheensuring
Bundesbank a (2015),
smooth implementation
Giovannelli of
et al. (2020),
6 In addition, one NCB still accepts a “rating tool” in its ACC framework. See also footnote 16.
Schirmerpolicy.
monetary (2014), Accepting
Wukovits (2016),
bank forloans
descriptions of individual
as collateral NCBs’
helps ICASs.
avoid the need for
5
See Article 18.1 of the Protocol on the Statute of the European System of Central Banks and of the
counterparties to hold specific marketable assets only for the purpose of
European Central Bank.
collateralising
6 monetary policyaoperations.
In addition, one NCB still accepts “rating tool” in Bank
its ACCloans haveSee
framework. relatively low 16.
also footnote opportunity
costs as collateral,
ECB Occasional Paperwhereas
Series Nomarketable
284 / Octoberassets
2021 are increasingly used as collateral in6
private market repo transactions.
At
ECBthe same time,
Occasional the
Paper acceptance
Series of illiquid
No 284 / October bank loans leads to certain side effects, 6
2021
including operational challenges and risks for the Eurosystem. In general,
appropriate risk management enables the achievement of policy objectives with the
ICASs play a special role in the ECAF due to the fact that they allow counterparties
to mobilise as collateral the loans (also called “credit claims”) granted to NFCs,
which in many cases are not assessed by other credit assessment systems available
to these counterparties. ICASs are used in particular by small and medium-sized
banks that lend primarily to SMEs but do not have an IRB system and are not in a
recommendations of the Financial Stability Board. 7 Finally, NCBs also use the
position to fund themselves by issuing asset-backed securities (ABSs) or covered
ratings of ICASs for various other purposes beyond monetary policy operations, such
bonds. Moreover, ECAI ratings are available only for a small share of NFCs, while
as for macroprudential and microprudential motives.
they are usually not available for SMEs.
The rest of this paper is structured as follows. Section 2 describes in detail the role of
Already in normal times, the acceptance of ICASs thus contributes to sufficient
ICASs in the context of the Eurosystem’s credit operations. Section 3 analyses the
collateral availability for a wide range of counterparties with different business
Eurosystem’s guidelines and requirements to which national ICASs must adhere,
models and operating in different markets, ensuring a smooth implementation of
inter alia in terms of measuring default probabilities, the role of statistical models
monetary policy. Accepting bank loans as collateral helps avoid the need for
versus expert analysis, input data, validation analysis and performance monitoring.
counterparties to hold specific marketable assets only for the purpose of
Section 4 presents the main features of each of the seven ICASs currently accepted
collateralising monetary policy operations. Bank loans have relatively low opportunity
within the ECAF, highlighting similarities and differences, while the annex provides a
costs as collateral, whereas marketable assets are increasingly used as collateral in
more detailed description of the features of each of the ICASs. Section 5 concludes.
private market repo transactions.
At the same time, the acceptance of illiquid bank loans leads to certain side effects,
including operational challenges and risks for the Eurosystem. In general,
appropriate risk management enables the achievement of policy objectives with the
lowest possible risk for the Eurosystem. Collateral eligibility and use requirements as
well as risk control measures aim to ensure that these bank loans are treated in an
equivalent manner to other eligible assets from the perspective of the Eurosystem’s
risk exposure (see, for example, Tamura and Tabakis, 2013, and ECB, 2015).
But ICASs provide an even more important contribution to the transmission

mechanism in times of market tension as they allow banks to increase the share of
non-marketable collateral (provided that the minimum credit quality requirement is
satisfied) when there is a shortage of marketable assets or the latter have lost value.
This role is exemplified by the measures adopted by the Eurosystem in April 2020,
during the pandemic-related financial and economic crisis, when the Governing
Council decided on a set of collateral measures to facilitate an increase in bank
funding against loans to corporates and households. This increase was to be
achieved by expanding the use of credit claims as collateral, in particular the so-
called ACC frameworks that allow NCBs to enlarge the scope of eligible credit claims
for counterparties in their jurisdictions. Credit claims and in particular ACCs are
typically mobilised by relying on ICAS or IRB assessments. The effectiveness of
these measures was demonstrated by the significant increase in such collateral that
was observed in several jurisdictions in 2020.
Besides these benefits for counterparties and for the implementation of monetary
policy, ICASs offer several further advantages for the Eurosystem. By supporting
banks to mobilise loans rather than government bonds or other marketable assets,
ICASs help to diversify Eurosystem balance sheet risks. In addition, ICASs provide
Eurosystem-internal credit assessments for a large number of European NFCs as an
alternative or complement to ratings by rating agencies, thus helping to reduce the
Eurosystem’s reliance on the latter and contributing to implementing the
7
In October 2010, the FSB published principles for reducing reliance on credit rating agency ratings and
ECBrequested
The Occasional
rest of thisthatPaper
paperSeries
standard No and
issetters 284regulators
structured/ October 2021 Section
as follows.
consider 2 describes
next steps intaken
that should be detail
to the 7
rolethe
translate of
principles into more specific policy actions.
versus
ECB expert analysis,
Occasional Paper Seriesinput data,
No 284 validation
/ October 2021analysis and performance monitoring. 8
The rest of this paper is structured as follows. Section 2 describes in detail the role of
versus expert analysis, input data, validation analysis and performance monitoring.
7
In October 2010, the FSB published principles for reducing reliance on credit rating agency ratings and
requested that standard setters and regulators consider next steps that should be taken to translate the
principles into more specific policy actions.

2 ICASs in the context of the
Eurosystem’s monetary policy
2 ICASs in the context of the
operations
Eurosystem’s monetary policy
operations
2.1 Credit claims as eligible collateral for the Eurosystem’s
credit operations
2.1 Credit claims as eligible collateral for the Eurosystem’s
The importance of ICASs is closely related to the use of credit claims to NFCs 8 as
credit operations
collateral in Eurosystem monetary policy operations. The Eurosystem has
Chart 1
traditionally used credit operations with financially sound banks as its main tool8 for
The importance
Increasing use ofofcredit
ICASs is closely
claims related to
asincollateral in the use of credit
Eurosystem creditclaims to9 NFCs as
operations
steering short-term interest rates its monetary policy implementation. Even if
collateral in Eurosystem monetary policy operations. The Eurosystem has
asset purchases have become the quantitatively dominant liquidity-providing
(left scale: EUR billions after valuation and haircuts; right scale: share of total mobilised collateral after valuation and haircuts)
traditionally used credit operations with financially sound banks as its main tool for
instrument since
Central 2015,
government credit operations
securities have remained an important monetary
Non-marketable*
steeringRegional
short-term
government interest
securitiesrates in itsCreditmonetary
claims* policy implementation. 9 Even if
policy tool, in particular
Unsecured bank bonds in the form of Fixed-term andlonger-term
targeted cash deposits* refinancing operations
asset purchases have become the quantitatively dominant liquidity-providing
(TLTROs). At the end of 2020, the Eurosystem
Covered bank bonds
lentcredit
Average outstanding
almost €1.8 trillion to euro area
instrument since 2015, credit operations have remained an important monetary
Corporate bonds Share of credit claims* (in %)
credit institutions, representing 16% ofShare
Asset-backed securities euro area GDP.
of non-marketable assets* (in %)
policy tool, Other in particular
marketable assets in the form of targeted longer-term refinancing operations
3,000 35%
(TLTROs).
All lending At the end of 2020,
in Eurosystem creditthe Eurosystem
operations must lentbealmost
based €1.8 trillion tocollateral.
on adequate euro area
credit
This institutions, representing 16% of euro area GDP.
2,500 requirement is included in Article 18.1 of the Protocol on the Statute of the
30%
European System of Central Banks and of the European Central Bank. The collateral 25%
All lending in Eurosystem credit operations must be based on adequate collateral.
2,000
protects the Eurosystem against financial risks arising from the default of a
This requirement is included in Article 18.1 of the Protocol on the Statute of the 20%
borrowing
1,500 bank.
European System of Central Banks and of the European Central Bank. The collateral 15%
protects
For the Eurosystem
1,000 historical against
and structural financial
reasons, risks arisinghas
the Eurosystem from the default
always of a a wide
accepted
10%
borrowing bank. for its credit operations 10, in particular to ensure sufficient
range of collateral
500
collateral availability for a wide range of counterparties with different business 5%
For historical and structural reasons, the Eurosystem has always accepted a wide
models
0 and operating in different markets.10Chart 1 shows that the share of credit 0%
range2004of collateral 2006 for its credit operations
2008 2010 2012, in particular
2014 to2016
ensure sufficient
2018 2020
claims has steadily increased from below 5% towards close to 30% of the total
collateral availability for a wide range of counterparties with different business
mobilised
Source: ECB. collateral over the last 15 years, even if marketable assets (mainly bonds)
models
Notes: Use ofand operating
collateral: averages ofin differentdata;
end-of-month markets.
credit:
11 based Chart
on daily1data.
shows that“credit
* Until 2012, the claims”
shareandof“fixed-term
credit and
remain
cash thewere
deposits” main source
reported jointly in of collateral.
the category “non-marketable assets”.
claims has steadily increased from below 5% towards close to 30% of the total
mobilised
The collateral
acceptance over the
of credit last as
claims 15 collateral
years, even if marketable
provides several assets
benefits, (mainly
as bonds)
remain the main source of collateral. 11
highlighted for example by the ECB (2006). With the level of bank intermediation and
bank-based financing in the euro area still high, credit claims remain the most
important asset class on banks’ balance sheets, and thus their acceptance
contributes to wide collateral availability. Accepting credit claims helps avoid the
need for counterparties to hold specific marketable assets only for the purpose of
collateralising monetary policy operations. Credit claims have relatively low
opportunity costs as collateral because they are rarely traded and counterparties
have
8 Thelimited alternative
definition usescorporations”
of “non-financial for them, other than
is the one securitisation
given or selling
in Regulation (EU) themontothe
No 549/2013
European system of national and regional accounts in the European Union.
other parties. The acceptance of credit claims as collateral increases the usability of
thisSee, for example, ECB (2011) for more information on the role of credit operations in the ECB’s
9
entire asset class for counterparties, since they can be easily exchanged with
monetary policy.
8 The
central definition of “non-financial iscorporations” is the one given in Regulation
(HQLA).(EU)12 No 549/2013 on the
10
See, bank
European
money,
for example,
system of
which
Chapter 9 in
national and
a high-quality
Bindseil et al.
regional
liquid
(2009).
accounts
asset
in the European Union.
This can foster
the
11
9 smooth functioning
in 2020 is linkedof
tothe
the euro
ECB’s area
response financial
to the system
COVID-19 and support
See, for example, ECB (2011) for more information on the role of credit operationsfurther
The jump pandemic, as inbank lendinginto
the explained
ECB’s
Box 1.
non-financial customers. Moreover, a wide and differentiated collateral framework,
monetary policy.
alsoSee, for example, Chapter 9 in helps

Bindseildiversify
et al. (2009).
10
including credit claims, risks for the Eurosystem’s balance sheet.
11 The jump in 2020 is linked to the ECB’s response to the COVID-19 pandemic, as further explained in
Box 1.
At the same time, the acceptance of illiquid bank loans leads to certain operational
challenges for the Eurosystem and also additional risks, which could materialise in 9
ECB Occasional Paper Series No 284 / October 2021
BANCO DE ESPAÑA
the event of a counterparty default. Eligibility and use requirements as well as risk
13 DOCUMENTO OCASIONAL N.º 2131
control measures
ECB Occasional aim
Paper to ensure
Series No 284 that these
/ October bank loans are treated in an equivalent 9
2021
manner to other eligible assets from the perspective of the Eurosystem’s risk
Covered bank bonds Average outstanding credit
Asset-backed securities Share of non-marketable assets* (in %)
Chart 1Other marketable assets
Increasing
3,000 use of credit claims as collateral in Eurosystem credit operations 35%
30%
Chart
(left
2,500scale:1
EUR billions after valuation and haircuts; right scale: share of total mobilised collateral after valuation and haircuts)
Central government securities Non-marketable*

Increasing use of credit claims as collateral
Regional government securities
in Eurosystem credit operations
Credit claims*
25%
2,000
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(left scale: EUR billions
Covered after
bank valuation and haircuts; right scale:
bonds share
Average of total mobilised
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Regional government securities Credit claims*
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10%
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exposure. For example, the
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3,000
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acceptance of a broad range of collateral, and if necessary an even broader 30% 20%
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Notes: Use of collateral: averages of end-of-month data; credit: based on daily data. * Until 2012, “credit claims” and “fixed-term 25% and
15%
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500 15%
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bank-based
0 financing in the euro area still high, credit claims remain the most 10% 0%
benefiting2004 from2006 adequate 2008protection 2010 of its2012 balance2014 sheet. 2016 2018 2020
important
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purchases.
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non-financial
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12
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andratio
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13 By aiming at a risk-equivalent treatment across assets, the Eurosystem’s risk management seeks to
andThe
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transformation paper
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classes reflect that credit
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liquid assets.
sufficient level of consistency across credit operations from a risk management perspective.
in Section
ECB
14 Occasional
For
2.3.Paper
example, in SeriesofNo
the context 284 claim
credit / October 2021the Eurosystem needs to take into account the 10
collateral,
financial intermediation role of the central bank and the interaction with commercial banks’ regulatory
requirements, in particular their regulatory liquidity coverage ratio requirements.
15
See ECB (2015) for a description of the rules and ECB (2014a, 2014b) for the legal acts specifying the
ECBgeneral
Occasional Paper Series No 284 / October 2021 10
2.2 Evaluating credit quality with the ECAF
framework (in particular for marketable assets and credit claims) and the temporary framework
(in particular for additional credit claims).
BANCO DE ESPAÑA 14 16
DOCUMENTO
In addition, one NCB still accepts a “rating tool” in its ACC framework. The Eurosystem phased out the
OCASIONAL N.º 2131
Theuse
Eurosystem
of rating toolsfulfils itsgeneral
from its statutory requirement
framework of policy
for monetary “adequate collateral”
operations with detailed
owing to cost-benefit
considerations in May 2019 (see the related press release).
rules on eligibility, valuation and risk control measures – in particular valuation
haircuts. 15 Both eligibility and valuation haircuts depend among other criteria on the
to be able to conduct its monetary policy operations smoothly, even for large
operations at very short notice, while taking into account potential side effects 14 and
benefiting from adequate protection of its balance sheet.
The evolution of the acceptance of credit claims as collateral, the related benefits
and challenges for the Eurosystem and other specific issues related to their use
have been highlighted and examined on several occasions, for example by Tamura
exposure. 13 For example, the lower liquidity of credit claims compared with
and Tabakis (2013). This paper complements some important milestones for credit
marketable assets is compensated by higher valuation haircuts (see ECB, 2015).
claims in the Eurosystem collateral framework with the genesis and the use of ICASs
The acceptance of a broad range of collateral, and if necessary an even broader
in Section 2.3.
range during crisis periods (see Box 1), is also part of a risk-efficient implementation
of monetary policy in the euro area, in other words the achievement of policy
exposure. 13with
objectives Forthe example, the lowerrisk
lowest possible liquidity
for the ofEurosystem.
credit claimsThe compared
Eurosystem with needs
2.2 Evaluating
marketable
to be able toassets credit
conduct qualitypolicy
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valuation
operations haircutseven
smoothly, (seefor ECB, large2015).
The acceptance
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and
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periodsprotection
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1),itsisbalance of “adequate
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of a risk-efficient implementation detailed
rules
of on eligibility,
monetary policyvaluation
in the euro and risk in
area, control
other measures
words the –achievement
in particularof valuation
policy
The evolution
haircuts. 15
Both of the acceptance
eligibility and of
valuationcredit claims
haircuts
objectives with the lowest possible risk for the Eurosystem. The Eurosystem as collateral,
depend among the related
other benefits
criteria on the
needs
and challenges for the Eurosystem and other specific
to be able to conduct its monetary policy operations smoothly, even for large internal
credit quality of the collateral, which the Eurosystem issues
evaluates related
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and external
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potential example
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14
and
related Tabakis
rules, (2013).
procedures This paper
and complements
techniques.
benefiting from adequate protection of its balance sheet. The some
ECAF important
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set forth for
the credit
claims
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credit risk assessment with the genesis
and due diligence and theofuse
in the context assetof ICASs
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in evolution
Section
purchases. 2.3.of the acceptance of credit claims as collateral, the related benefits
and challenges for the Eurosystem and other specific issues related to their use
The ECAF
have been uses information
highlighted from threeontypes
and examined several of credit assessment
occasions, systems
for example to cover
by Tamura
the range
and Tabakis of (2013).
accepted Thismarketable assets and some
paper complements credit important
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2.2 Evaluating credit quality with the ECAF
claims in the Eurosystem collateral framework with the genesis andand
ICASs for NFCs, there are also four credit rating agencies (ECAIs) the dozens
use of ICASsof
commercial
in Section banks’ IRB systems. The ECAF ensures that the credit ratings from all
2.3.
16
The Eurosystem fulfils its statutory requirement of “adequate collateral” with detailed
systems are comparable by mapping each of their rating grades to the appropriate
rules on eligibility, valuation and risk control measures – in particular valuation
credit quality step (CQS) of the Eurosystem’s harmonised rating scale (see Table 1).
haircuts. 15 Both eligibility and valuation haircuts depend among other criteria on the
2.2 Evaluating
credit quality of the
Table 1
credit quality
collateral, which with the ECAF
the Eurosystem evaluates using multiple internal
and external credit assessment systems, including ICASs. The ECAF defines the
The Eurosystem’s harmonised rating scale for the general collateral framework
The
related Eurosystem
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statutory requirement
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haircuts.
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commercial
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general
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TheInECAF
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systems it uses, before and after16their acceptance. The due diligence on accepted
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which is particularly relevant in the context of asset purchases.
ECBBy
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13 Occasional
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avoid distorting asset prices or overly influencing market processes and market participants’ behaviour.
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It consists
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See ECB (2015) for a description of the rules and ECB (2014a, 2014b) for the legal acts specifying the
1. general framework (in
a quantitative particular for
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component, and credit
to check claims)
whether theand the temporary
mapping framework
of the
BANCO DE ESPAÑA 15 DOCUMENTO(in particular
OCASIONAL for additional credit claims).
N.º 2131
ratings of each credit assessment system to the Eurosystem’s harmonised
ECB
16
InOccasional Paper
addition, one NCB Series No 284
still accepts / October
a “rating tool” 2021 11
in its ACC framework. The Eurosystem phased out the
rating
use scale
of rating toolsisfrom
appropriate;
its general framework for monetary policy operations owing to cost-benefit
considerations in May 2019 (see the related press release).
2. a qualitative component, which examines the credit assessment processes and

which is particularly relevant in the context of asset purchases.
The due diligence comprises a vast set of regulatory, operational and information
requirements for the acceptance of credit assessment systems in the ECAF. These
aim to protect the Eurosystem from financial risks and to ensure comparability,
accuracy and consistency among the different systems that provide credit
assessment
Table 1 information to the Eurosystem, while taking particular account of the
respective regulatory
The Eurosystem’s situations.rating
harmonised
17
scale for the general collateral framework
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(probability performance
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due Credit
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performance the acceptance of credit assessment systems in the ECAF.
aim to protectRisk
Eurosystem the Management
Eurosystem from financialwhich
Committee, risks and to ensureofcomparability,
is comprised the senior risk
accuracy and consistency among the different systems that provide credit
assessment information to the Eurosystem, while taking particular account of the
17
For example, to be considered for ECAF purposes, it is a necessary but not sufficient condition that
respective
ECAIs areregulatory
supervised by situations. 17
the European Securities and Markets Authority (ESMA) as credit rating
agencies, while IRB systems have to be authorised for capital requirements purposes by the relevant
banking supervisor. For its in-house credit assessment capabilities, in particular its ICASs, the
TheEurosystem
“ECAF performance monitoring process” is the key tool for the annual ECAF
cannot rely on external supervision, and thus these are directly monitored by national risk
due diligence on all accepted
management functions and systems.
the ECB’s 18
It Risk
Directorate consists of:
Management.
18
As part of the harmonised criteria for temporarily eligible ACCs, the requirements for reporting and
monitoring under the ECAF are applied to all credit assessment systems used to assess the credit
1. a quantitative statistical component, to check whether the mapping of the
quality of credit claims accepted under the national frameworks for such ACCs.
rating scale is appropriate;
2. a qualitative component, which examines

2021 the credit assessment processes and
methodologies, taking into account the information provided by the systems
themselves as well as by the respective supervisors.
For the seven ICASs for NFCs accepted by the Eurosystem (see Figure 1), the
relevant NCBs’ risk management functions and the ECB’s Directorate Risk
Management share the ECAF due diligence with clearly assigned responsibilities.
approval of fundamental changes, and the action points of the annual ECAF
performance monitoring process, based on assessments endorsed by the
Eurosystem Risk Management Committee, which is comprised of the senior risk
17
For example, to be considered for ECAF purposes, it is a necessary but not sufficient condition that
ECAIs are supervised by the European Securities and Markets Authority (ESMA) as credit rating
2.3 Historical evolution of ICASs
agencies, while IRB systems have to be authorised for capital requirements purposes by the relevant
Eurosystem cannot rely on external supervision, and thus these are directly monitored by national risk
management functions and the ECB’s Directorate Risk Management.
18
2.3.1 Use of ICASs
monitoring before
under the the
ECAF are introduction
applied of thesystems
to all credit assessment EMUused
in 1999
to assess the credit
Before the introduction of the EMU in 1999, commercial papers were widely used as
BANCO DE ESPAÑA
collateral for refinancing operations in many Member States (including Germany,
Spain, France, Italy and Austria). In particular, they were accepted for refinancing
operations with the respective NCB in the course of rediscounting operations,
provided the issuer had sufficient credit quality.
For the seven ICASs for NFCs accepted by the Eurosystem (see Figure 1), the
relevant NCBs’ risk management functions and the ECB’s Directorate Risk
Management share the ECAF due diligence with clearly assigned responsibilities.
approval of fundamental changes, and the action points of the annual ECAF
performance monitoring process, based on assessments endorsed by the
Eurosystem Risk Management Committee, which is comprised of the senior risk
managers of all Eurosystem central banks. Section 3 elaborates on the underlying
Eurosystem
17 guidelines
For example, for ICASs
to be considered in purposes,
for ECAF more detail.
it is a necessary but not sufficient condition that
ECAIs are supervised by the European Securities and Markets Authority (ESMA) as credit rating
agencies,
Figure 1 while IRB systems have to be authorised for capital requirements purposes by the relevant
ICASs in the Eurosystem
Eurosystem cannot rely on external supervision, and thus these are directly monitored by national risk
management functions and the ECB’s Directorate Risk Management.
2.3 Historical
18 evolution of ICASs
monitoring under the ECAF are applied to all credit assessment systems used to assess the credit
2.3.1 Use of ICASs before the introduction of the EMU in 1999
The Occasional
ECB assessment of credit
Paper Series quality
No 284 /has always
October 2021been important for collateral purposes.
12
Spain, France, Italy and Austria). In particular, they were accepted for refinancing
In addition, some NCBs had their own specific reasons to build up know-how in
credit risk assessment. In the 1950s, for example, the Oesterreichische Nationalbank
(OeNB) started to assess the credit quality of NFCs applying for subsidised loans
financed by grants of the European Recovery Program (Marshall Plan). Due to the
exceptional management of the funds granted, their total volume is currently in
excess of €1 billion and the OeNB is today still involved in the assessment of credit
quality for the purposes of the European Recovery Program. The Banca d’Italia (BdI)
developed models and methodologies to assess the credit quality of Italian firms
mainly for the purposes of banking supervision. The Banque de France (BdF) has
been involved in corporates’ credit risk assessment since its creation, more than
200 years ago. Corporate rating activity started in 1987 and was first developed to
support monetary policy. Prior to that, credit risk assessment could take the form of
classification agreements or instructions given to banks for both monetary policy
2.3 Historical evolution of ICASs
purposes and for tightening credit regulations. The Banco de España (BdE) began to
establish an ICAS at the end of the 1990s to complement the work performed by
international rating agencies (ECAIs), as their services were not used widely by
2.3.1 Use
Spanish of firms.
ICASs before
It was the considered
therefore introduction of thetoEMU
necessary assessinNFCs
1999in order to
expand the credit quality coverage for monetary policy purposes.
2.3.2 Evolution
Spain, France,during theAustria).
Italy and first decade of the
In particular, theyEMU
were accepted for refinancing
Initially, the Eurosystem used a two-tier system for collateral to smoothen the
transition for market participants from the previously applicable national frameworks
to addition,
In the EMU.some Tier one
NCBsassets
had comprised debt instruments
their own specific reasons tothat complied
build with euro
up know-how in
area common
credit eligibility criteria
risk assessment. (e.g. marketable
In the 1950s, for example, assets), whereas tier two
the Oesterreichische assets
Nationalbank
consisted
(OeNB) of those
started assets the
to assess thatcredit
were approved by NCBs
quality of NFCs but did
applying fornot comply with
subsidised loanseuro
area-widebyeligibility
financed grants of criteria at that time.
the European Within Program
Recovery this framework,
(Marshallonly the NCBs
Plan). Due toofthe
Germany, Spain, France, the Netherlands and Austria accepted
exceptional management of the funds granted, their total volume is currently in credit claims as tier
two collateral,
excess and only
of €1 billion and four of themis(Germany,
the OeNB Spain, France
today still involved and Austria) of
in the assessment used an
credit
ICAS for NFCs.
This set-up was reviewed in the early 2000s, and the ECB (2006), the Deutsche
Bundesbank (BBk) (2006) and Tamura and Tabakis (2013) present some of the
general
ECB issuesPaper
Occasional that were
Seriesidentified. A single
No 284 / October list of Eurosystem collateral accepted for
2021 13
credit operations was introduced in 2007 to address these issues and to foster a
area common eligibility criteria (e.g. marketable assets), whereas tier two assets
consisted of those assets that were approved by NCBs but did not comply with euro
area-wide eligibility
quality for the purposescriteria at that
of the time. Within
European this framework,
Recovery onlyBanca
Program. The the NCBs of (BdI)
d’Italia
Germany,
developedSpain,
modelsFrance, the Netherlands
and methodologies and Austria
to assess accepted
the credit credit
quality claims
of Italian as tier
firms
two
mainly for the purposes of banking supervision. The Banque de France (BdF) hasan
collateral, and only four of them (Germany, Spain, France and Austria) used
ICAS for NFCs.in corporates’ credit risk assessment since its creation, more than
been involved
200 years ago. Corporate rating activity started in 1987 and was first developed to
This set-up was reviewed in the early 2000s, and the ECB (2006), the Deutsche
support monetary policy. Prior to that, credit risk assessment could take the form of
Bundesbank (BBk) (2006) and Tamura and Tabakis (2013) present some of the
classification agreements or instructions given to banks for both monetary policy
general issues that were identified. A single list of Eurosystem collateral accepted for
purposes and for tightening credit regulations. The Banco de España (BdE) began to
credit operationsthe
this experience, was introduced in the
2007 to was
address these issues and to foster a
establish an ICAS atICAS model
the end of
of the BdI
1990s subsequently
to complement developed
the work in by
performed
harmonised
the 2010s. collateral framework for all market participants. With this update to the
international rating agencies (ECAIs), as their services were not used widely by
framework, Eurosystem counterparties in all countries gained the possibility to use
Spanish firms. It was therefore considered necessary to assess NFCs in order to
credit claims as non-marketable collateral. The extension and harmonisation of the
expand the credit quality coverage for monetary policy purposes.
framework intensified the cross-border use of credit claims and as well as their
2.3.3 The importance of ICASs in the ECAF today
overall deployment, especially in times of crisis.
2.3.2 During the financial and

Evolution thesovereign debt crises, demand for liquidity within the
In addition toduring
the original firstexisting
four decade of the
ICASs EMU(from
for NFCs Germany, Spain,
banking system rose. This resulted in an increased volume of mobilised collateral in
France and Austria), a credit assessment approach for mortgage-backed promissory
monetary
Initially, thepolicy operations.
Eurosystem usedSince then, system
a two-tier non-marketable
for collateral assets have become
to smoothen the more
notes (MBPNs) issued by Irish credit institutions was applied by the Central Bank of
important for
transition (see Chartparticipants
market 1 in Sectionfrom 2.1).theTo previously
ensure thatapplicable
banks have full access
national to
frameworks
Ireland from 1999, when MBPNs were approved as an eligible asset. 19 The BdI
central bank liquidity even in adverse circumstances,
to the EMU. Tier one assets comprised debt instruments that complied with euro the Eurosystem made it
carried out initial investigations into the possible development of an ICAS at the
possible
area commonfor NCBs to temporarily
eligibility criteria (e.g. accept additional
marketable types whereas
assets), of collateral, in particular
tier two assets
beginning of the 2000s. These efforts led to the creation of the ValCre statistical
ACCs. 20
From 2012 until the beginning of 2020, the
consisted of those assets that were approved by NCBs but did not comply with euro mobilised collateral volume
model, used since 2006 for the purpose of benchmarking and risk control as well as
continuously
area-wide shrank,criteria
eligibility but theatshare of regular
that time. Withinand thisACCs continued
framework, onlyto thegrow.
NCBs Thisof
in the context of measures taken during the 2010-2011 financial crisis. Building on
Germany, Spain, France, the Netherlands and Austria accepted credit claims as to
trend was further strengthened with the collateral easing measures in response tier
this experience, the ICAS model of the BdI was subsequently developed in
the COVID-19
two collateral, and pandemic
only four in April
of them 2020 (see Box Spain,
(Germany, 1). France and Austria) used an
the 2010s.
ICAS for NFCs.
One reason for the greater use of credit claims is that marketable assets have higher
19 The Irish ICAS for MBPNs is largely outside the scope of this paper because it uses a very different
opportunity
This set-up from
approach costs
was when
ICASs used
reviewed
the for in asconsidered
the
NFCs collateral
early infor
2000s, monetary
thisand
paper.the ECB policy operations.
(2006), Due to
the Deutsche
2.3.3 The importance
increased
Bundesbank risk(BBk) of ICASs
perception
(2006) byand creditininstitutions,
Tamura theand ECAF thetoday
Tabakis scale
(2013) of present
unsecured some money
of themarket
transactions between banks has shrunk since the financial
general issues that were identified. A single list of Eurosystem collateral accepted for crisis. As a result,
During the financial
marketable assetswas andincreasingly
are sovereign debt crises, demand in for liquidity within21the
credit operations introduced in used 2007 as collateral
to address these theissues
repo market.
and to foster a
harmonised collateral framework for all market participants. With this update to the 14
ECB Occasional
Regulatory Paper
changes Series
have No
also 284 / October
played a 2021
major role. Since 2015, regulatory
monetary
authoritiespolicyhave operations. Since
requiredcounterparties
banks to then,
hold in non-marketable
sufficient HQLAs. assets
By usinghave become
credit claims more
as
framework, Eurosystem all countries gained the possibility to use
important
collateral (see
for Chart
monetary 1 in Section
policy 2.1).
operations, To ensure
HQLAs that
are banks
gained have
in the full
formaccess
of to
credit claims as non-marketable collateral. The extension and harmonisation of the
central bank liquidity
unencumbered other even in adverse
(marketable) HQLAscircumstances, thecentral
Eurosystem made it
framework intensified the cross-border useor of additional
credit claims and bank
as well money held in
as their
possible
excess offor
the NCBs
bank’sto temporarily
minimum accept
reserve additional
requirements. types
22 of collateral, in particular
overall deployment, especially in times of crisis.
ACCs. 20 From 2012 until the beginning of 2020, the mobilised collateral volume
continuously
While
In addition to shrank,
the possibility ofbut
the original the
fourshare
pledging of regular
credit
existing claims for
ICASs and ACCsbanks
provides
NFCs continued
(from to grow.
with additional
Germany, This
Spain, funding
and
trendsupports
France wasandfurtherbanks in
a fulfilling
strengthened
Austria), the
withrequired
credit assessment liquidity
the collateral
approach coverage
easing
for ratio, itinmay
measures
mortgage-backed also have
response to
promissory
side
notes effects,
the COVID-19
(MBPNs) such as anby
pandemic
issued increased
inIrish
Aprilcredit bank
2020 dependency
(see Box 1).
institutions on central
was applied by bank funding.
the Central 23
Bank of
Ireland from 1999, when MBPNs were approved as an eligible asset. 19 The BdI
The importance
One reason for the of ICASs
greaterfor theofEurosystem
use credit claimshas grown
is that in parallelassets
marketable with thehavegreater
higher
carried out initial investigations into the possible development of an ICAS at the
opportunity
role of creditcosts
claims when used
in the as collateral
collateral for monetary
framework. policy operations.
As a consequence, the due Due to
diligence
beginning of the 2000s. These efforts led to the creation of the ValCre statistical
for ICASs has
increased also significantly
risk perception by creditimproved. In 2012,
institutions, the Eurosystem
the scale of unsecured started
money its market
first
model, used since 2006 for the purpose of benchmarking and risk control as well as
comprehensive
transactions reviewbanks
between of thehasfourshrunk
existing ICASs
since theat the time.
financial The As
crisis. ICAS review
a result,
in the context of measures taken during the 2010-2011 financial crisis. Building on
marketable
resulted in the assets are increasingly
elaboration used as and
of best practices collateral
enhanced in therules
repoon market.
documentation
21
and operational
Regulatory requirements.
changes have also The played newa measures
major role.aimed Since at reducing
2015, potential risks
regulatory
by setting best
authorities havepractices
requiredfor existing
banks andsufficient
to hold future ICASs.
HQLAs. A more detailed
By using description
credit claims as of
collateral
the
19 The Irishfor
Eurosystem’smonetary
ICAS MBPNs policy
for guidelines operations,
for
is largely ICASs, forHQLAs
outside the example
scope arepaper
of this gained
regarding in documentation
becausethe form
it uses of different
a very and
approach from the
unencumbered ICASs
other for NFCs considered
(marketable) HQLAs in this paper.
or additional central bank money held in
20
ACCs are credit claims that do not fulfil all the eligibility criteria 22
applicable under the general collateral
excess of theFor
framework. bank’s minimum
example, ACCs canreserve requirements.
be of lower credit quality than the generally accepted credit claims
or be denominated in currencies other than the euro. To compensate for the associated higher risks,
the the
While national central banks
possibility impose higher
of pledging creditvaluation
claimshaircuts.
providesSee, banks
for example,
with Box 3 of ECB funding
additional (2015)
ECBand https://www.ecb.europa.eu/explainers/tell-me-more/html/acc_frameworks.en.html.
and
21 supports banks in fulfilling the required liquidity coverage ratio, it may also have
See, for example, Deutsche Bundesbank (2013).
side
22 effects,
See Grandiasuch
et al. as an for
(2019) increased
an analysisbank
of thedependency
demand for HQLAonduecentral
to thebank funding.
LCR and
23
other factors.
23
With a broad collateral framework, banks may have little incentive to become independent of central
Thebank
importance
funding for of ICASs
their liquidityfor the Eurosystem
management hasrate
(due to fixed grown in parallel
full allotment), with
mainly the greater
because the
BANCO DE ESPAÑA 18 DOCUMENTOcollateral which
OCASIONAL N.º 2131 is mobilised cannot be used to obtain market funding. While conducting this lender of
rolelast
of resort
creditfunction
claimsduring
in the collateral framework. As a consequence, the due diligence
system wide crises is important, it may have side effects during regular times.
for ICASs has also significantly improved. In 2012, the Eurosystem started its first
comprehensive review of the four existing ICASs at the time. The ICAS review
resulted in the elaboration of best practices and enhanced rules on documentation
the 2010s.
opportunity costs when used as collateral for monetary policy operations. Due to
increased risk perception by credit institutions, the scale of unsecured money market
transactions between banks has shrunk since the financial crisis. As a result,
this experience,
marketable assets theare ofincreasingly
ICAS ICASs model in theBdI
of the
used ECAF
aswas today
subsequently
collateral in the repo developed
market. 21 in
the 2010s. changes have also played a major role. Since 2015, regulatory
Regulatory
During the financial and sovereign debt crises, demand for liquidity within the
authorities have required banks to hold sufficient HQLAs. By using credit claims as
collateral for monetary policy operations, HQLAs are gained in the form of
monetary policy operations. Since then, non-marketable assets have become more
unencumbered otherof ICASs inHQLAs
(marketable) the ECAF or additionaltodaycentral bank money held in
important (see Chart 1 in Section 2.1). To ensure that22banks have full access to
excess of the bank’s minimum reserve requirements.
default definition, follows in Section 3. In addition, new ICASs developed by Banka
central
During the bank liquidityand
financial even in adverse
sovereign debt circumstances,
crises, demand thefor Eurosystem
liquidity within made theit
Slovenije (BS) (in 2012), the BdI (in 2013) and the Banco de Portugal (BdP)
possible
While
banking for
thesystem NCBs
possibility rose.tooftemporarily
pledging
This resulted accept
credit in24an additional
claimsincreasedprovides types
volume of collateral,
banks ofwith in particular
additional
mobilised funding
collateral in
(in 2016) 20 received ECAF acceptance , increasing the total number to seven.
25
As
ACCs.
and supports
monetary From
policy 2012
banks until
in fulfilling
operations. the beginning
the then,
Since required of 2020,
liquidity
non-marketable the mobilised
coverage assets collateral
ratio,
have it may volume
become also have
more
far as loans to NFCs are concerned, 26 ICASs are the credit assessment source with
continuously
side effects,
important (see shrank,
such Chart as an but
1 the
inincreased share2.1).
Section of regular
bank Todependency
ensure and that ACCs on continued
central
banks have bank to grow.
full funding.
access This 23
to
the highest mobilised collateral value after haircuts in the regular collateral
trend was
central bank further
liquiditystrengthened
even27in adverse with the collateral easing
circumstances, the measures
Eurosystem in response
made it to
framework
The importance (see Chart of ICASs 2). forSince the only relatively
Eurosystem few NFCs have a credit quality
the COVID-19
possible for NCBs pandemic to temporarily in April 2020 accept (see Box 1). types of collateral, in the
additional
has grown in parallel with greater
particular
assessment
role of 20 from an external credit rating agency,
credit claims in the collateral framework. As a consequence, the due diligence ICASs and IRB systems help to
ACCs. From 2012 until the beginning of 2020, the mobilised collateral volume
increase
One
for reason
ICASs the
has diversity
for also of available
the significantly
greater use of rating sources
credit claims
improved. In 2012, isand thebroaden
that marketable
Eurosystem the assets
set of eligible
started have higher
its first
continuously shrank, but the share of regular and ACCs continued to grow. This
credit claims.
opportunity costsThis applies
when used in particular
as collateral to
comprehensive review of the four existing ICASs at the time. The ICAS review SMEs,
for for
monetary which ECAI
policy ratings
operations. areDue generally
to
trend was further strengthened with the collateral easing measures in response to
not available.
increased
resulted theToday,
inrisk perception
elaboration ICASs byofand
bestIRB
credit systems
institutions,
practices and arethe mostly
scale of
enhanced chosen
unsecured
rules as documentation
on themoney
rating market
source
the COVID-19 pandemic in April 2020 (see Box 1).
for the credit
transactions quality
between assessment
banks has of credit
shrunk claims
since
and operational requirements. The new measures aimed at reducing potential risks the to NFCs,
financial whereas
crisis. As ECAIs
a result,are used
for setting
the assessment
marketable assets of credit claims towards as public sector entities. IRB systems playof
the are increasingly used collateral that in Athe repo market. 21
by
One reason best for practices greater foruseexisting
of credit andclaimsfuture ICASs.
is more
marketable detailed
assetsdescription
have higher
a greater
Regulatory
the Eurosystem’srole for
changes ACCs have
guidelines as they
also can
played alsoa be
major used role. to assess
Since loans
2015, to private and
regulatory
opportunity costs when usedfor as ICASs,
collateral forfor example
monetary regarding documentation
policy operations. Due to
households
authorities
default suchrequired
have
definition, as
followsresidential banks
in mortgages.
Sectionto hold
3. In sufficient
addition, HQLAs.
new ICASsBy using
developedcredit claims
by Banka as
increased risk perception by credit institutions, the scale of unsecured money market
20
ACCs are
collateral for credit claims that
monetary policy do not fulfil all the eligibility
operations, HQLAs criteria
are applicable
gained inunder
the the
form general
of collateral
Slovenije
transactions (BS) (in
between 2012), banks the hasBdIbe(in of2013)
shrunk sinceandquality
thefinancial
the Banco de Portugal
crisis. As a (BdP)
result,
Theframework. For
greater availability example, ACCs
of ICAS can ratings lowerhas credit
benefitedthan thetheEurosystem,
generally accepted
its credit claims
unencumbered
(in 2016) received other ECAF
in (marketable)
currencies acceptance
other HQLAs
than 24
,
marketable assets are increasingly used as collateral in the repo market. higher
or be denominated the or
increasing
euro. additional
To the
compensate central
total fornumber
the bank tomoney
associated 21 held
seven. Asin
25risks,
counterparties
the national central and banks the euro impose areahighereconomy
valuation in multiple
haircuts. See,ways. ICASs
for example, Box assess
3 of ECBthe credit
(2015)
excess
far as
Regulatory of
andloans
the bank’s
to NFCs have
changes minimum
are concerned, reserve
also played aICASs
26 requirements. 22
major are
https://www.ecb.europa.eu/explainers/tell-me-more/html/acc_frameworks.en.html. role.the credit
Since assessment
2015, regulatory source with
quality of debtors that may not be assessed by any other system. They help smaller
the highest mobilised collateral value after
authorities have required banks to hold sufficient HQLAs. By using credit claims as
21 See, for example, Deutsche Bundesbank (2013). haircuts in the regular collateral
banks the
While which do not have
possibility of pledging sufficient creditresources
claims to establish
provides bankstheirwith ownadditional
IRB system. funding By
framework
22 See Grandia
collateral for(see Chart
et al.
monetary (2019) 2). for27anSince
policy analysis only
operations, relatively
of the demand
HQLAsfor few HQLA
are NFCs due have
gained toin a credit
thethe
LCR quality
and other
form of factors.
promoting
and
23 supports
With credit
a broad banks claims
collateral as collateral,
inframework,
fulfilling the
banks ICASs
required
may have foster
liquidity allcoverage
little incentive thetobenefits
become ratio,ofitthis
mayasset
independent also
of class
have
central
assessment
unencumbered from an external credit rating agency, ICASs and IRB systems help to
highlighted
side bank funding
effects, forother
insuch
Section
their (marketable)
2.1.
as liquidity
an ICASs
management
increased
HQLAs
are
bank an
(due toorfixed
important
dependency
additional
rateelement
full
on
central
in the
allotment),
central
bank money
because held
Eurosystem’s
mainly
bank funding. 23 in
the
increase
excess ofthe
collateral the diversity
which bank’s of available
minimum
is mobilised be rating
cannotreserve used to sources
requirements.
obtain market andfunding.
broaden
22 While the set of eligible
conducting this lender of
strategy to reduce
last resort function duringmechanisticsystem wide reliance
crises ison external
important, ratings,
it may have side in line with
effects various
during regular times.
credit
The claims.
importance This applies
of ICASs for in particular
the Eurosystem to SMEs, for
has grown which ECAI
in parallel ratings are generally
initiatives by international authorities to lower such reliance in legal,with the greater
regulatory and
While the
not available. possibility
Today,inICASsof pledging and IRB systems are mostly chosen as the ratingfunding
credit claims provides banks with additional source
role of credit claims the 28collateral framework. As a consequence, the due diligence
other public frameworks. The role of ICASs is particularly relevant in crisis times,
and
for thesupports
credit banks assessment
in fulfilling theofrequired liquidity coverage ratio, itECAIs
may also used have
for
when ICASs hasquality
sufficient also significantly
collateral to participate
credit claims
improved. in the In 2012, to the
Eurosystem’s
NFCs, whereas
Eurosystem started are
lending operations its 23first
side
for the effects,
assessment such as of an increased
credit claims bank
towards dependency
publicatsector on central
entities. bank funding.
IRB systems
comprehensive
ECB
becomesOccasional
paramount. review
Paper Series of the
This No
has four
284 existing
/ October
been evident ICASs
2021 most recently the time. The the
during ICAS review play15
COVID-19
a greater
resulted role
in(see for ACCs
the elaboration as they
of best can also
practices be used
and to assess loans to private
pandemic
The importance Box 1). Overall,
of ICASs for theICASs
Eurosystem thus contributehasenhanced
grown to intherules
smooth
parallel on with
documentation
implementation
the greater
households
and operational such as residential
requirements. mortgages.
The new measures aimed at reducing potential risks
of monetary
role of credit policyclaimsand in the protect the Eurosystem
collateral framework. from As a financial
consequence, risks. the due diligence
by
for setting best practices for existing and future ICASs. A more detailed description of
TheICASs
greater has also significantly
availability of ICAS improved.
ratings hasInbenefited 2012, thethe Eurosystem
Eurosystem, started
its its first
More
the NCBs may decide
Eurosystem’s guidelines to develop
for ICASs, an ICAS forICASs in the coming
example regarding years. The introduction
documentation and of
comprehensive
counterparties and review the euro of thearea four existing
economy in multiple at the time.ICASs
ways. The ICAS
assess reviewthe credit
AnaCredit 29 in 2018 overcame a major obstacle for the development of credit risk
resulted
quality
20
ACCsofare
indebtors
the elaboration
credit claimsthat thatmaydoof notbest
not be
practices
fulfilassessed
all the eligibility
and enhanced
by criteria
any other rules
system.
applicable
onthe
underThey
documentation
help collateral
general smaller
models by NCBs that previously lacked a credit register.
and
banks operational
framework.
which For requirements.
do example,
not have ACCs canThe
sufficient be of newlowermeasures
resources creditto quality aimed
than the
establish at reducing
generally
their ownaccepted
IRB potential
creditrisks
system. claims
By
by setting
promoting
the nationalbest
credit practices
central claims
banks as for
impose existing
collateral, and future
ICASshaircuts.
higher valuation ICASs.
foster all See, A
the more
for benefits detailed
example, Box of this description
asset
3 of ECB classof
(2015)
the Eurosystem’s
and
highlighted guidelines for ICASs,
are anfor exampleelement
https://www.ecb.europa.eu/explainers/tell-me-more/html/acc_frameworks.en.html.
in Section 2.1. ICASs important regarding in thedocumentation
Eurosystem’s and
21 See, for example, Deutsche Bundesbank (2013).
strategy to reduce mechanistic reliance on external ratings, in line with various
20
22 ACCs
See are credit
Grandia claims
et al. (2019)that
fordoannot fulfil allofthe
analysis theeligibility
demandcriteriafor HQLA applicable under
due to the LCRtheand
general
other collateral
factors.
initiatives
23 framework.
With
by international
a broadFor example,
collateral ACCsauthorities
framework, canbanks
be of may to lower
lower credit
have
such
quality
little
reliance
than to
incentive
in legal,
thebecome
generally regulatory
accepted
independent credit and
claims
of central
otherbankpublic
fundingframeworks. 28
The role of(due
for their liquidity management ICASsto fixedis particularly relevant
rate full allotment), mainlyinbecause
crisis thetimes,
the national
collateral central
which banks impose
is mobilised cannothigher
be used valuation haircuts.
to obtain marketSee, for example,
funding. Box 3 of ECB
While conducting (2015)of
this lender
when lastsufficient
and collateral to participate
wide crisesin is the Eurosystem’s
it may have lending
https://www.ecb.europa.eu/explainers/tell-me-more/html/acc_frameworks.en.html.
resort function during system important, operations
side effects during regular times.
becomes
21
24 See, for paramount.
example,
In addition, This
Deutsche
the Nationale Bank has
vanbeen
Bundesbank evidentNationale
(2013).
België/Banque most recently de Belgiqueduring the an
operated COVID-19
ICAS from 2013
22 See Grandia et al. (2019) for an analysis of the demand for HQLA due to the LCR and other factors.
to 2019.
pandemic (see Box 1). Overall, ICASs thus contribute to the smooth implementation
23
25 With
Figurea1broad collateral
provides framework,
an overview of allbanks
ICASsmay have
in the little incentive to become independent of central
Eurosystem.
of monetary
bank policy and protect the Eurosystem fixedfrom financial risks. because the
26 Creditfunding
claims for
for their
publicliquidity
sector management
entities which(due to have
do not rate full
a direct allotment),
ECAI ratingmainly
as well as pools of credit
ECBcollateral
Occasional
whichPaper
is Series
mobilised No 284
cannot be/ October
used to 2021
obtain market
claims which include loans assessed by both IRB systems and ICASs or via an funding. While conducting this lender of15
NCB-specific
More lastNCBs
resort function
methodology may during
decide
are not system wide crises
to develop
considered. an ICAS is important,
in theit coming
may haveyears.
side effects
Theduring regular times.
introduction of
AnaCredit
27 There is alsointhe
29
2018 overcame
possibility a major
to use ICASs obstacle assets
for marketable for the development
without of credit
an ECAI rating. risk are
Since there
very few bonds issued without at least one rating by a credit rating agency, this option has hardly been
models
used inbypractice.
NCBsThe thatGoverning
previously lacked
Council decided a credit register.
in September 2020 to accept such marketable assets
only until the go-live of the Eurosystem Collateral Management System, which is currently planned for
ECBNovember
Occasional Paper Series No 284 / October 2021
2023. 15
28 See, for example, FSB (2014).
29 See Israël et al. (2017) for a description of the Analytical Credit Dataset “AnaCredit” of the Eurosystem.

24 In addition, the Nationale Bank van België/Banque Nationale de Belgique operated an ICAS from 2013
counterparties and the euro area economy in multiple ways. ICASs assess the credit
quality of debtors that may not be assessed by any other system. They help smaller
banks which do not have sufficient resources to establish their own IRB system. By
promoting credit claims as collateral, ICASs foster all the benefits of this asset class
highlighted in Section 2.1. ICASs are an important element in the Eurosystem’s
strategy to reduce mechanistic reliance on external ratings, in line with various
initiatives
default by international
definition, follows inauthorities
Section 3.toInlower suchnew
addition, reliance
ICASs in developed
legal, regulatory and
by Banka
other public
Slovenije frameworks.
(BS) (in 2012), theThe
28
BdIrole of ICASs
(in 2013) andisthe
particularly
Banco derelevant
Portugalin(BdP)
crisis times,
when sufficient collateral to participate24 in the Eurosystem’s lending operations25
(in 2016) received ECAF acceptance , increasing the total number to seven. As
becomes
far as loansparamount.
to NFCs are Thisconcerned,
has been 26evident
ICASsmost recently
are the creditduring the COVID-19
assessment source with
pandemic (see Box 1). Overall, ICASs thus contribute to the smooth
the highest mobilised collateral value after haircuts in the regular collateral implementation
of monetary(see
framework policy and2).
Chart protect
27 theonly
Since Eurosystem
relativelyfrom
few financial
NFCs have risks.
a credit quality
assessment from an external credit rating agency, ICASs and IRB systems help to
More NCBs may decide to develop an ICAS in the coming years. The introduction of
increase the diversity of available rating sources and broaden the set of eligible
AnaCredit 29 in 2018 overcame a major obstacle for the development of credit risk
default
credit claims.definition, Thisfollows
appliesininSectionparticular 3. In to addition,
SMEs, for newwhichICASsECAI developed
ratings are by generally
Banka
models by NCBs that previously lacked a credit register.
Slovenije
not available. (BS)Today,(in 2012), ICASs theand BdI IRB (in 2013)
systems andare themostly
Bancochosende Portugal as the(BdP) rating source
(in
for 2016)
the creditreceivedqualityECAF acceptance
assessment 24
of credit , increasing
claims to the NFCs, totalwhereas
number ECAIs to seven. As
are25used
Chart 2
far
for as theloans to NFCsofare
assessment concerned,
credit claims towards26
ICASs are the
public credit
sector assessment
entities. IRB systemssourceplay with
Use of credit assessment systems for loans to NFCs mobilised as collateral in
the highest
a greater role mobilised
for ACCs collateral
as they value can also after behaircuts
used toinassess the regular
loans collateral
to private
Eurosystem credit operations
framework
households(see suchChart 2). 27 Since
as residential only relatively few NFCs have a credit quality
mortgages.
assessment
(left from an
scale: share of mobilised external
collateral credit
value after rating
haircuts agency,
of different ICASssystems;
credit assessment and IRB systems
right scale: help to
2014 = 100)
The greater
ICASs availability of ICAS ratings has benefited
increase the diversity of available rating sources and broaden the set of eligible
ECAIs the Eurosystem, its
IRBs Mobilised loans to NFCs (right-hand scale)
counterparties
credit claims.the and
This the euro
applies area
invan economy
particular to SMEs,in multiple
for de ways.
which ECAIICASs assess
ratings an are
the credit
ICASgenerally
60% In addition, Nationale Bank België/Banque Nationale Belgique operated from 2013
24
180
quality of debtors
not toavailable.
2019. Today, thatICASs
may not andbeIRB assessed
systemsbyare any other chosen
mostly system.as They
the help
ratingsmaller
source
160
50% Figure 1 provides an have
overview of all ICASs in the Eurosystem.
25
banks
for the which
credit do not
quality sufficient
assessment of resources
credit claims to establish
to NFCs, their
whereasown IRB ECAIs system.
are By
used
140
26 Credit claims for public sector entities which do not have a direct ECAI rating as well as pools of credit
promoting
for credit claims as collateral, ICASs fosterand all ICASs
the benefits of this asset class
40%theclaims assessment
which include of credit
loans claims
assessed towards
by both public
IRB systems sector entities.
or via anIRB systems
NCB-specific play
120
highlighted
methodology
a greater role in Section
are not
for ACCs 2.1.
as ICASs
considered. they can arealsoan important
be used toelement assess in the Eurosystem’s
loans to private 100
30% There is toalso the possibility to use ICASs for marketable assets without in
an line
ECAIwithrating. Since there are
27
strategy
households reduce
suchissued
asmechanistic
residential reliance
mortgages. on external ratings, various
very few bonds without at least one rating by a credit rating agency, this option has hardly been 80
initiatives by international
used in practice. The Governing authorities to lower
Council decided such reliance
in September 2020 toin legal,
accept regulatory
such marketableand assets
20% 60
Theonly
other until the
greater
public go-live of theofEurosystem
availability
frameworks. The roleCollateral
28ICAS ratings hasManagement
of ICASs benefited System,
the
is particularly which is currently
Eurosystem,
relevant in its planned
crisis times,for
November 2023. 40
counterparties
when
10%
28 See,sufficient
for example,
and the euro
collateral
FSB (2014).
area economy
to participate in theinEurosystem’s
multiple ways.lending ICASs operations
assess the credit
20
quality
becomes
29 of debtors
See Israëlparamount. that This
et al. (2017) may
for not be
has been
a description assessed
ofevident
the Analyticalby
mostany other
recently
Credit system.
Datasetduring They
the
“AnaCredit” of help
COVID-19 smaller
the Eurosystem.
0% 0
banks which
pandemic 2014(see doBoxnot2015
have
1). sufficient
Overall, 2016ICASs resources
thus to establish
2017contribute 2018to thetheir own IRB
smooth
2019 system.
implementation
2020 By
promoting
of monetary credit
policy claims as collateral,
and protect ICASs foster
the Eurosystem from allfinancial
the benefitsrisks.of this asset class
Source: ECB.
highlighted
Note: in Section
Only credit claims 2.1.the
mobilised under ICASs are anframework
general collateral important element in the Eurosystem’s
are included.
More
ECB
strategy NCBs
Occasional may
to reduce decide
Paper SeriestoNo
mechanistic develop
284reliance an ICAS
/ October on 2021 in the coming
external ratings,years.
in lineThe withintroduction
various of
16
AnaCredit 29
in 2018 overcame a major obstacle
initiatives by international authorities to lower such reliance in legal, regulatory andfor the development of credit risk
Box 1 models by NCBs that previously lacked a credit
other public frameworks. 28
The role of ICASs is register.
particularly relevant in crisis times,
ICASs and the ECB’s response to the COVID-19 pandemic
when sufficient collateral to participate in the Eurosystem’s lending operations
When the COVID-19 pandemic becomes
hit Europe paramount.
in the firstThis quarterhas been
of 2020, evident most recently
it triggered a human during
tragedy the COVID-19
pandemic (see Box 1). Overall, ICASs
and an extreme economic downturn. Fiscal and monetary authorities around the globe took thus contribute to the smooth implementation
of monetary
unprecedented policy measures to counterpolicy and protect
the effects on thethe economyEurosystem from financial
and financial markets. risks.
As of March 2020, the ECB decidedMore NCBs may steps

in several decidetotoease develop an ICAS
monetary in the
policy andcoming
stabiliseyears. The introduction of
markets
AnaCredit
by introducing the pandemic emergency
29
in 2018 overcame a major obstacle
purchase programme (PEPP) and various additional for the development of credit risk
24 In addition, the Nationale Bank van België/Banque Nationale de Belgique operated an ICAS from 2013
lending operations, which were models by NCBs
supported
to 2019.
that
in April previously
2020 by severallacked a credit collateral
significant register. easing
measures as summarised in Table 25
A. The
Figure collateral
1 provides easingof measures
an overview all ICASs in theaimed at improving funding
Eurosystem.
26 Credit claims
conditions for the real economy during for public sector
the COVID-19 entities
crisis, notwhich
leastdobynotfacilitating
have a directbanks’
ECAI rating as well
access to as pools of credit
claims which include loans assessed by both IRB systems and ICASs or via an NCB-specific
Eurosystem lending operations during the pandemic
methodology period. Such measures favoured a greater use
are not considered.
of credit claim collateral, in particular
27 ThereACCs, and
is also the thus indirectly
possibility to use ICASstheforuse of ICASs
marketable featured
assets without an ECAI rating. Since there are
prominently. The share of creditused
30
claims in mobilised
in practice. collateral
The Governing Council thus increased
decided from2020
in September 24%to to 29%such
accept in marketable assets
2020 (see Chart 1), and the volume onlyof loans
until to NFCs
the go-live of themobilised
Eurosystem under theManagement
Collateral general collateral
System, which is currently planned for
November 2023.
framework increased by 42% 28 (see Chart 2).
24 See, for example,
In addition, FSB (2014).
the Nationale Bank van België/Banque Nationale de Belgique operated an ICAS from 2013
29 to
See2019.
Israël et al. (2017) for a description of the Analytical Credit Dataset “AnaCredit” of the Eurosystem.
25
Figure 1 provides an overview of all ICASs in the Eurosystem.
26Credit claims for public sector entities which do not have a direct ECAI rating as well as pools of credit
claims which include loans assessed by both IRB systems and ICASs or via an NCB-specific
BANCO DE ESPAÑA 20 DOCUMENTOmethodology
OCASIONAL N.º 2131are not considered.
ECBThere
27 Occasional
is also thePaper SeriestoNo
possibility 284
use / October
ICASs 2021
for marketable 16
assets without an ECAI rating. Since there are
used in practice. The Governing Council decided in September 2020 to accept such marketable assets
only until the go-live of the Eurosystem Collateral Management System, which is currently planned for
November 2023.
measures as summarised in Table A. The collateral easing measures aimed at improving funding
conditions for the real economy during the COVID-19 crisis, not least by facilitating banks’ access to
Eurosystem lending operations during the pandemic period. Such measures favoured a greater use
of credit claim collateral, in particular ACCs, and thus indirectly the use of ICASs featured
prominently. 30 The share of credit
Chart claims
2 in mobilised collateral thus increased from 24% to 29% in
2020 (see Chart 1), and the volume
Use ofof loansassessment
credit to NFCs mobilised systemsunder for loans the togeneral
NFCscollateral
mobilised as collateral in
framework increased by 42% Eurosystem
(see Chart 2). credit operations
Table A
Overview of the ECB collateral(lefteasing measures
scale: share adopted
of mobilised collateral valuein April
after 2020
haircuts of different credit assessment systems; right scale: 2014 = 100)
Table A
Category ICASs ECAIs Collateral easing measure
Overview of the ECB collateral easing measures adopted
IRBs in April
Mobilised loans to NFCs2020
(right-hand scale)
Expansion of credit claims 60% ACCs – Increased availability of credit assessment systems 180
Category Collateral easing measure
ACCs – Acceptance of COVID-19-related government/public sector guaranteed loans 160
Expansion of credit claims 50% ACCs – Increased availability of credit assessment systems
ACCs – Reduced reporting requirements 140
ACCs – Acceptance of COVID-19-related government/public sector guaranteed loans
40% Removal of the minimum size threshold for credit claims 120
ACCs – Reduced reporting requirements
Increase of Eurosystem risk tolerance Increase of Eurosystem risk tolerance by proportionate reduction of all haircuts for all assets by 20%
100
30% Removal of the minimum size threshold for credit claims
Reduction of haircuts for individual credit claims in the general framework, individual ACCs and pools
80
Increase of Eurosystem risk tolerance Increase
of ACCs of Eurosystem risk tolerance by proportionate reduction of all haircuts for all assets by 20%
20% 60
Reduction
Increase ofofthe
haircuts for individual credit claims in
See
30
de Guindos concentration
and limit for
Schnabel unsecured
(2020) athemore
forbank generaltoframework,
bonds 10%
detailed individual ACCs and pools
description of the measures and their
of ACCs 40
Reduced procyclicality of rating downgrades purpose. The ECB Governing Council decided on
Collateral eligibility freeze, with a floor of CQS5 (CQS4 for ABSs) 10 December 2020 to extend the pandemic-related
10%
collateral
Increase ofeasing measures
the concentration limituntil June 2022.
for unsecured bank bonds to 10%
20
Greek waiver Acceptance of Greek sovereign bonds as collateral
Reduced procyclicality of rating downgrades Collateral eligibility freeze, with a floor of CQS5 (CQS4 for ABSs)
0% 0
Source: de Guindos and Schnabel (2020). 2014 2015 2016 2017 2018 2019 2020
Greek waiver Acceptance of Greek sovereign bonds as collateral
Note: The table only lists collateral measures that were introduced in response to the COVID-19 crisis.
Source: ECB.
Source: de Guindos and Schnabel (2020). ECB Occasional
Note: Only Paper
credit claims Series
mobilised under No 284 / collateral
the general Octoberframework
2021 are included. 17
TheThe
Note: ECB table had already
only lists createdthatthe
collateral measures werepossibility for NCBs
introduced in response to temporarily
to the COVID-19 crisis. accept ACCs in 2011
under
specific rules adapted to local needs, provided that certain agreed minimum eligibility and risk
The ECB had already created the possibility for NCBs to temporarily accept ACCs in 2011 under
Box 1
management requirements were fulfilled. ACC frameworks mainly allow for the acceptance of loans
specific rules adapted to local needs, provided that certain agreed minimum eligibility and risk
ICASs
to smallerand the ECB’s firms
non-financial response to the COVID-19
and households, as well as pandemic
debtors with lower credit quality. Following
management requirements were fulfilled. ACC frameworks mainly allow for the acceptance of loans
the April 2020 decisions, the nine NCBs with already existing ACC frameworks modified them, and
to smaller
When non-financial
the COVID-19 firms and households, asfirst
well31as debtors with itlower creditaquality. Following
eight additional NCBspandemic
created ahit Europe
new in the
ACC framework quarter
, oftenofin2020,
parallel triggered
with government humanmeasures
tragedy
the April
and an 2020 decisions, the nine NCBs with already existing ACC frameworks modified them, and
such asextreme economic downturn.
COVID-19-related guaranteeFiscal
schemes and whose
monetary authorities
guarantees around
usually the 70%-80%
cover globe tookof the
eight additional policy
unprecedented NCBs measures
created a new ACC framework
to counter the effects
31
, often
on in paralleland
the not
economy with government measures
loan amounts. Many of these ACCs are assessed by ICASs, least for thefinancial markets.
credit quality of the
such as COVID-19-related guarantee schemes whose guarantees usually cover 70%-80% of the
non-guaranteed part of the COVID-19-related government guarantee schemes. The Eurosystem
As ofamounts.
loan March 2020, Many theofECB
thesedecided
ACCs arein several
assessed stepsby to ease not
ICASs, monetary
least for policy and stabilise
the credit markets
quality of the
can thus lend against the full loan amount, minus of course a valuation haircut that depends on the
by introducing the
non-guaranteed pandemic
part emergency purchase
of the COVID-19-related programme
government (PEPP)schemes.
guarantee and various Theadditional
Eurosystem
credit quality and other loan characteristics.
lending
can thusoperations,
lend against which were
the full supported
loan amount,inminusApril of
2020 by several
course significant
a valuation haircutcollateral easing
that depends on the
measures
credit as
quality summarised
and other loan in Table A. The
characteristics. collateral easing measures aimed
The ECB also created the possibility for NCBs to make use of additional credit assessment systems at improving funding
conditions
for for the real
ACC purposes. economy
In the courseduring
of 2020,theseveral
COVID-19 NCBs crisis,
with not least by
an ICAS facilitating
decided banks’
to follow theaccess
exampleto
The ECB
Eurosystem also created
lending the possibility
operations during for NCBs to make use of additional credit assessment systems
of the BdI (see Antilici et al., 2020) andthe pandemic
started period. Such
to complement theirmeasures
existing ICASs favouredwithamore
greater use
for
of ACC purposes.
credit claim In the in
collateral, course of 2020,
particular ACCs,several
and NCBs
thus with anthe
indirectly ICASuse decided
of ICASs to featured
follow the example
resource-efficient statistical ICASs (S-ICASs), appropriately calibrated to facilitate the assessment
of the BdI (see
prominently. 30 Antilici et al., 2020) and started to complement their existing ICASs with more
The share ofwhile creditensuring
claims inadequate
mobilisedrisk collateral thusThey
increased from 24% to 29% inof
of a wider range of debtors protection. assess a larger number
resource-efficient
2020 (see Chart statistical
1), and the ICASs
volume (S-ICASs),
of loans toappropriately
NFCs mobilisedcalibrated
under to facilitate
the general the assessment
collateral
SMEs than traditional ICASs, thus widening the scope of potentially eligible credit claims rated
of a wider range
framework of debtors
increased by 42% while
(seeensuring
Chart 2).adequate risk protection. They assess a larger number of
within the Eurosystem.
SMEs than traditional ICASs, thus widening the scope of potentially eligible credit claims rated
within the Eurosystem.
2.3.4 Use of ICASs beyond Eurosystem monetary policy operations

2.3.4 Use of ICASs
The credit beyond Eurosystem
quality assessments monetary
for NFCs provided policy
by ICASs haveoperations
proven useful
beyond standard monetary policy operations. In particular, ICAS ratings have been
The credit quality assessments for NFCs provided by ICASs have proven useful
applied for economic studies and financial stability analyses (see, for example, Cahn
et al., 2018, and Calza et al., 2021). For macroprudential and microprudential
applied
30
See deforGuindos
economic studies(2020)
and Schnabel and financial stabilitydescription
for a more detailed analyses (see,
of the for example,
measures and their Cahn
supervision,
purpose. The ICAS ratings provide
ECB Governing helpfulonbenchmarks
Council decided for banks’
10 December 2020 IRB
to extend the systems and
pandemic-related
collateral easing measures until June 2022.
supervision,
31
See the ECB ICAS ratings
website providelisthelpful
for an updated benchmarks
of the accepted for banks’ IRB systems and
ACC frameworks
(https://www.ecb.europa.eu/explainers/tell-me-more/html/acc_frameworks.en.html) and Tamura and
31 Tabakis
See the (2013) for the for
ECB website initially accepted
an updated listACC frameworks.
of the accepted ACC frameworks
ECBTabakis
Occasional
(2013)Paper
for theSeries
initiallyNo 284 / October
accepted 2021
ACC frameworks. 17

2.3.4 Use of ICASs beyond Eurosystem monetary policy operations
The credit quality assessments for NFCs provided by ICASs have proven useful
applied for economic studies and financial stability analyses (see, for example, Cahn
supervision, ICAS ratings provide helpful benchmarks for banks’ IRB systems and
the estimation of allowances and provisions for credit risk losses, as well as input for
31
See the ECB website for an updated list of the accepted ACC frameworks
stress testing exercises. As an example, the BdF recently used its ICAS rating model
for a climate-related
Tabakis (2013) for thestress-testing exercise
initially accepted ACC (see Allen et al., 2020). Finally, ICAS
frameworks.
ratings serve statistical purposes. For example, the BBk uses the data collected for
its ICAS as an input for its financial statement data pool, which is often used on an
anonymised basis for macroprudential and microeconomic studies on topics such as
supervision, financial stability, and monetary policy issues (see, for example, von 18
Kalckreuth, 2001). Similarly, ICAS information is used by the BdI and the BdE for
periodic financial stability publications, as well as for research purposes (see, for
example, Iannamorelli et al., 2020, De Socio et al. 2020, and Blanco et al., 2020).
Recently, some governments have started to use ICAS ratings in the context of
awarding public grants, advances or guarantees in order to monitor the performance
of companies that have benefited from public funds, and thus to measure the impact
of their policies. In France, for example, access to ICAS ratings has been granted to
regional councils (in the context of awarding public grants and advances) and to
state agencies involved in the prevention and handling of financial difficulties for
firms.
Furthermore, in some jurisdictions ICAS ratings have played a major role in the
provision of emergency liquidity assistance (ELA) by NCBs. In this regard, the
perimeter of NFCs eligible for ELA is expected to be higher than that for monetary
policy operations. Nonetheless, a fast and accurate risk measure of potential
collateral is also needed for ELA operations. Additionally, the organisation,
infrastructure and skills required to run an ICAS become very valuable in assessing
additional asset types accepted as collateral in an ELA.
Apart from NCBs’ internal uses, ICAS ratings may also be useful for other economic
agents. In particular, both credit institutions and NFCs may potentially benefit from
ICAS ratings (see, for example, Schirmer, 2014). To this extent, the existence of an
independent qualified opinion on the credit quality of an NFC provided by the ICAS
rating and, in particular, the eligibility of the company’s credit claims as collateral for
monetary policy operations may be important information for both parties in the
negotiation process to grant financing and set the terms of loan agreements. The
relevance of this use may vary between countries, depending on the NCB’s
communication policy of its ICAS ratings to credit institutions and NFCs.
Additionally, the BdF’s ICAS is the only ICAS whose ratings may be used by credit
institutions to calculate their regulatory capital requirements. This is possible
because the BdF’s ICAS has been recognised as an “external credit assessment
institution” by the relevant regulatory authorities.

2.4 ICASs’ portfolio composition and relative usage
2.4 This sectionportfolio
ICASs’ 32
composition
aims to provide and relative
a better understanding usage
of ICASs’ portfolio composition
(size and sector distribution of rated NFCs) and relative importance for assessing the
This
creditsection 32
quality of
the collateral aims to provide
non-marketable
mobilised, the most a collateral
better understanding
important insectors areof“other
ICASs’
the Eurosystem’s portfolio
credit composition
operations.
services”, “financial
(size and sector distribution of rated NFCs)
services” , “real estate”, “energy” and “transportation”.
34 and relative importance for assessing the
On average, one-third of the companies assessed by ICASs
credit quality of non-marketable collateral in the Eurosystem’s credit operations. are large-sized and two-
thirds are SMEs
Differences between (see ICASs
Chart 3). Withinofthe
in terms size SMEs, companies
and sector are fairly
composition of evenly
the rated
On average,
distributed
companies one-third
among
may the for
arise of the
differentcompanies
several sizes assessed
(medium,
reasons. byand
small
For example, ICASs are large-sized
micro).
the In termsmay
differences of and two-
be due
thirds SMEs (see
are mobilised
collateral
to heterogeneities inby Chart
thesize, 3).
largeWithin
productive the SMEs,
companies
structure companies
account
of the for the are
country’s fairlyshare
highest
economy evenly (54%),
or the
distributed
followed among
by medium-sized
different purposes the different
of each (26%), sizes
ICAS beyond (medium,
small-sized small and micro).
(13%) and micro-sized
the Eurosystem’s In terms of
companies
monetary policy
collateral
operationsmobilised
(7%). (see Section by size, large companies account for the highest share (54%),
2.3.4).
followed by medium-sized (26%), small-sized (13%) and micro-sized companies
Chart 3
(7%). 4
Size
Sectordistribution
distribution of ofcompanies
companies assessed
assessed byby ICASs
ICAScompared
comparedtotocollateral
collateralmobilised
mobilised
Chart 3
Large-sized entities
Financial services Small-sized
Food Products entities
Size distribution
Medium-sized
Energy of companies
entities assessed
Micro-sized
Retail Trade by ICASs compared to collateral mobilised
entities
100% Transportation Wholesale Trade
Chemistry entities
Large-sized Other Services entities
Small-sized 7%
90% Metal productsentities
Medium-sized 18% Other activities entities
Micro-sized
13%
Real Estate
100%
80%
7%
100%
90%
70% 18%
24%
90% 18% 13%
26%
80%
60%
80% 16%
70%
50% 24%
17% 26%
70% 25%
60%
40% 5%
6%
60% 11% 4%
50%
30%
25% 54%
50% 10% 11%
40%
20%
40% 32% 5%
10%
30%
10% 5%
54%
30% 8% 10%
20%
0%
32%
8%
Total companies Total 10%
collateral
20%
10% 6%
10% 6%
Notes: figures are calculated as a simple average of the percentages14%
0% Data as at 30 June 2020. Total4% of the individual ICASs.
0% 3%
Total companies Total collateral
ChartData
Notes: 4 as
shows the
at 30 June number
2020. ofare
Total figures companies
calculated as a and
simple collateral
average of the mobilised
the distributed
percentages of the by
individual ICASs.
Notes: Data as at 30 June 2020. Total figures are calculated as a simple average of the percentages of the individual ICASs.
company’s sector of economic activity. In particular, the ten sectors explicitly
Chart 4 shows
represented in the
the number
chart areofthose
companies and collateral
with a weighting mobilised
higher than 5%distributed
in terms ofby the
company’s sector of
number of entities oreconomic activity. In by
collateral mobilised particular,
all ICASs.theThe sectors explicitly
ten remaining five sectors 33
represented in the chart are those with a weighting
have been grouped in the category “other activities”. higher than 5% in terms of
number of entities or collateral mobilised by all ICASs. The remaining five sectors 33
ICASsbeen
have cover a wide in
grouped range of sectors“other
the category with their ratings. A third of the sectors (5 of 15)
activities”.
account for approximately 60% of all companies and collateral mobilised by ICASs.
ICASs
Regardingcoverthea number
wide range of sectors with
of companies, their ratings.
the sectors “otherAservices”,
third of the“wholesale
sectors (5trade”,
of 15)
account for approximately
“retail trade”, “food products”60%andof “real
all companies
estate” haveandthe
collateral
highestmobilised by ICASs.
share. Measured by
Regarding the number of companies, the sectors “other services”, “wholesale trade”,
“retail trade”, “food products” and “real estate” have the highest share. Measured by
the collateral mobilised, the most important sectors are “other services”, “financial
services” 34, “real estate”, “energy” and “transportation”.
Differences between ICASs in terms of size and sector composition of the rated
companies
32 All the ICAS may arise
figures for several
provided reasons.
in this section For
include theexample, the
ratings which relydifferences mayofbe due
on a combination
quantitative models with expert assessment (full ICAS ratings) but not the ratings based on a purely
to heterogeneities in the productive structure of the country’s economy or the
statistical assessment (S-ICAS ratings, see Box 1).
32
All the ICAS
different figuresof
purposes provided
each in this section
ICAS include the ratings which rely on a combination of
33 Other manufacturing, machinery and beyond
equipment, the Eurosystem’s
vehicle monetary
manufacturing, policy
construction and information
quantitative models with expert assessment (full ICAS ratings) but not the ratings based on a purely
and communication.
operations (see Section 2.3.4).
statistical assessment (S-ICAS ratings, see Box 1).
34 The European System of Accounts (ESA) sector classification is the relevant one for the definition and
33 Other manufacturing, machinery and equipment, vehicle manufacturing, construction and information
therefore eligibility of NFCs, whereas the NACE classification may differ. This explains why certain
Chart
and 4communication.
corporations providing financial services are still part of the corporations rated by ICASs. This sector
Sector distribution
category corresponds of to
companies
NACE code assessed
64 “Financialby ICAS
service compared
activities, exceptto collateral
insurance and mobilised
pension
ECBfunding”. Particularly,
Occasional NFCs classified
Paper Series No 284 / as holding2021
October companies (NACE code 6420) are included in this
20
sectorFinancial
category.
services Food Products
Energy Retail Trade
Transportation
Paper Series No Wholesale Trade 2021
ECB Occasional
Chemistry
284 / October
Other Services
20
Metal products Other activities
BANCO DE ESPAÑA 23 RealN.º
DOCUMENTO OCASIONAL Estate
2131
ECB
100% Occasional Paper Series No 284 / October 2021 21
18% 13%
90%
80% 16%
17%
70%
the collateral mobilised, the most important sectors are “other services”, “financial
services” 34, “real estate”, “energy” and “transportation”.
Differences between ICASs in terms of size and sector composition of the rated
companies may arise for several reasons. For example, the differences may be due
to heterogeneities in the productive structure of the country’s economy or the
different purposes of each ICAS beyond the Eurosystem’s monetary policy
operations (see Section 2.3.4).
Chart 4
Sector distribution of companies assessed by ICAS compared to collateral mobilised
Financial services Food Products
Energy Retail Trade
Transportation Wholesale Trade
Chemistry Other Services
Metal products Other activities
Real Estate
100%
18% 13%
90%
80% 16%
17%
70% 5%
6%
60% 11% 4%
50% 10% 11%
40% 5%
10%
5%
30% 8% 10%
20% 8%
10%
6%
10% 6%
4% 14%
0% 3%
Notes: Data as at 30 June 2020. Total figures are calculated as a simple average of the percentages
percentages of
of the
the individual
individual ICASs.
ICASs.
34
34 The European System of Accounts (ESA) sector classification is the relevant one for the definition and
therefore eligibility of NFCs, whereas the NACE classification may differ. This explains why certain
corporations providing financial services are still part of the corporations rated by ICASs. This sector
category corresponds to NACE code 64 “Financial service activities, except insurance and pension
funding”. Particularly, NFCs classified as holding companies (NACE code 6420) are included in this
sector category.

3 The Eurosystem’s guidelines for ICASs
3 The Eurosystem’s guidelines for ICASs
3.1 Overview of the system
A core principle of the ECAF is to ensure consistency, accuracy and comparability
3.1 Overview of accepted
with regard to the the system
credit quality assessment systems. For this purpose, the
Eurosystem has outlined a series of common rules to be followed by NCBs when
A core principle of the ECAF is to ensure consistency, accuracy and comparability
operating an ICAS, both in the initial acceptance phase and in the regular usage of
with regard to the accepted credit quality assessment systems. For this purpose, the
the system.
Eurosystem has outlined a series of common rules to be followed by NCBs when
operating an ICAS,
The main aim both
of credit in the initial acceptance
assessments phase
through ICASs is toand in the the
evaluate regular usage
credit of
quality
theany
of system.
NFC that is an issuer, debtor or guarantor of eligible collateral. This principle
35
does not prevent ICASs from also being used for other purposes, such as banking
The main aim of credit assessments through ICASs is to evaluate the credit quality
supervision, assessment of financial stability from a macroprudential perspective,
of any NFC that is an issuer, debtor or guarantor of eligible collateral. 35 This principle
statistical purposes, economic studies and publications (see Section 2.3.4).
does not prevent ICASs from also being used for other purposes, such as banking
supervision,
Credit ratingsassessment of financial
issued by ICASs stability
are not subjectfrom a macroprudential
to the perspective,
Credit Rating Agencies
statistical purposes,
Regulation 36 economic
inasmuch studies
as, in line with and publications
its Article 2, they (see
(i) areSection 2.3.4).
not paid for by the
rated entity 37; (ii) are not disclosed to the public; (iii) are issued in accordance with
Credit ratings issued by ICASs are not subject to the Credit Rating Agencies
the principles, standards and procedures which ensure the adequate integrity and
Regulation 36 inasmuch as, in line with its Article 2, they (i) are not paid for by the
independence of credit rating activities as provided for by this Regulation; and (iv) do
rated entity 37; (ii) are not disclosed to the public; (iii) are issued in accordance with
not relate to financial instruments issued by the respective central banks’ Member
the principles, standards and procedures which ensure the adequate integrity and
States.
independence of credit rating activities as provided for by this Regulation; and (iv) do
not relate to financial
Nonetheless, instruments
ICASs have issued
to comply with by the respective
certain standardscentral banks’industry
which reflect Member
States.
best practices in terms of organisation, resources and governance and are aimed at
guaranteeing an adequate system structure for the purposes for which it has been
Nonetheless, ICASs have to comply with certain standards which reflect industry
designed. These Eurosystem standards/guidelines ensure that ICAS ratings follow
best practices in terms of organisation, resources and governance and are aimed at
principles, standards and procedures that establish at least the same level of
guaranteeing an adequate system structure for the purposes for which it has been
integrity and independence that is required by the Capital Requirements Regulation
designed. These Eurosystem standards/guidelines ensure that ICAS ratings follow
for credit rating agencies and banks’ IRB models. In this respect, ICASs should
principles, standards and procedures that establish at least the same level of
ensure that (i) the development of methodologies, (ii) validation and performance
integrity and independence that is required by the Capital Requirements Regulation
monitoring, and (iii) the rating of entities are allocated to different units managed by
for credit rating agencies and banks’ IRB models. In this respect, ICASs should
different personnel. The number of resources dedicated to the credit assessment
ensure that (i) the development of methodologies, (ii) validation and performance
should be commensurate with the number of rated entities.
monitoring, and (iii) the rating of entities are allocated to different units managed by
different
ICASs may personnel. The number
assess NFCs of any of resources
industry, sizededicated to the
and/or legal credit
form; ICASassessment
NCBs should
should the
inform be commensurate
Eurosystem about withthe
thecriteria
number of rated
used entities.
to select the entities to be assessed
by the system, for example in terms of sector and size. Monetary policy
ICASs may assess NFCs of any industry, size and/or legal form; ICAS NCBs should
counterparties can request a rating for a specific NFC upon submission of assets to
inform
35 the
Public Eurosystem
sector entities mayabout
only bethe criteria
assessed by used
ICASs to selecttothe
pursuant entities
Article 87(2)(c)toofbe assessed
Guideline
be potentially mobilised as collateral.
(EU) 2015/510 (ECB/2014/60) (GD) if they
by the system, for example in terms of sector and size. Monetary policy
(a) belong to S.13 according to the ESA 2010 sector classification;
A procedure
(b) forbusiness
conduct exchanging rating
that could information
be done between
by a non-financial ICASs and
corporation; has been agreed for
35 (c)
Public have
sectoratentities
least asmay
comprehensive
only be assessedand quantitative information
by ICASs pursuant available
to Article as required
87(2)(c) for the
of Guideline
cases in which
assessment
(EU) 2015/510
there are
of non-financial
(ECB/2014/60)
legal or
corporationseconomic
(GD) if theyby an ICAS.
links between NFCs located in different
European
36 (a)
Regulationjurisdictions.
belong to S.13
(EC) All information
according
No 1060/2009 to the
and its ESA exchanged
2010
subsequent sector between NCBs and that is not in
classification;
amendments.
(b) conduct business that could be done by a non-financial corporation; and
the (c)
37
public
There domain
is neither must be
a contractual kept confidential.
relationship between the NFCs and the ICAS NCB, nor any legal
have at least as comprehensive and quantitative information available as required for the
obligation for these corporations to provide non-public information to the ICAS NCB; any information is
assessment of non-financial corporations by an ICAS.
provided on a voluntary basis.
36 Regulation (EC) No 1060/2009 and its subsequent amendments.
37
There is neither a contractual relationship between the NFCs and the ICAS NCB, nor any legal
3.2 Credit risk
obligation measures:
for these default
corporations to provide probability
non-public information to theand riskanyclasses
ICAS NCB; information is
provided on a voluntary basis.
ECB Occasional
ICASs measure Paper Series
credit riskNo
as284
the/ probability 22
October 2021of default (PD) over a one-year horizon,
based on a common and harmonised default definition (see Section 3.6 for a
detailed description). The output of a credit assessment is the assignment to a rating
class that exclusively reflects the underlying risk of default for a given obligor. As
described in Section 2.2, the conduct of monetary policy operations requires
adequate collateral with high credit standards. These standards are ensured by
A procedure for exchanging rating information between ICASs has been agreed for
cases in which there are legal or economic links between NFCs located in different
European jurisdictions. All information exchanged between NCBs and that is not in
the public domain must be kept confidential.
A procedure for exchanging rating information between ICASs has been agreed for
3.2 Credit risk there
cases in which measures:
are legal ordefault
economic probability andlocated
links between NFCs risk classes
in different
European jurisdictions. All information exchanged between NCBs and that is not in
the public
ICASs domain
measure mustrisk
credit be as
kept
theconfidential.
probability of default (PD) over a one-year horizon,
based on a common and harmonised default definition (see Section 3.6 for a
3.2 Credit
class that risk measures:
exclusively reflects thedefault
underlyingprobability and
risk of default for riskobligor.
a given classes
As
adequate collateral
ICASs measure with
credit high
risk as credit standards.
the probability of These
defaultstandards
(PD) overare ensuredhorizon,
a one-year by
requiring
based on aa minimum
common rating or its quantitative
and harmonised default equivalent in the
definition (see form of3.6
Section anfor
assigned
a
annual PD, which is mapped to the CQSs on the Eurosystem harmonised rating
scale (seeexclusively
class that Table 1). reflects the underlying risk of default for a given obligor. As
In general, the PD is defined as the forward-looking forecast of the likelihood that a
adequate collateral with high credit standards. These standards are ensured by
particular obligor will default over a fixed assessment horizon. The PD itself is
requiring a minimum rating or its quantitative equivalent in the form of an assigned
unobservable because the event is stochastic. The only quantity statistically
annual PD, which is mapped to the CQSs on the Eurosystem harmonised rating
observable is the empirical default frequency.
scale (see Table 1).
Depending on the rating philosophy and the modelling choices, the calculated PD
In general, the PD is defined as the forward-looking forecast of the likelihood that a
can have different properties, i.e. a one-year-default PD can be point-in-time or
particular obligor will default over a fixed assessment horizon. The PD itself is
through-the-cycle. 38 The assignment of companies to rating classes is based on an
unobservable because the event is stochastic. The only quantity statistically
ex ante estimation of the PD.
observable is the empirical default frequency.
An ICAS rating scale must have a minimum of seven grades or rating classes for
Depending on the rating philosophy and the modelling choices, the calculated PD
non-defaulted obligors and one for defaulted obligors, but most ICASs actually have
can have different properties, i.e. a one-year-default PD can be point-in-time or
around 20 grades. 39 Each ICAS has to establish the structure of its rating scale, the
through-the-cycle. 38 The assignment of companies to rating classes is based on an
granularity and the individual PD intervals associated with each class.
ex ante estimation of the PD.
An ICAS rating scale must have a minimum of seven grades or rating classes for
3.3 Rating process
non-defaulted obligors and one for defaulted obligors, but most ICASs actually have
around 20 grades. 39 Each ICAS has to establish the structure of its rating scale, the
granularity and the
The ICAS rating individual
process PD intervals
consists associated
of a quantitative andwith each class.
a qualitative stage plus the
confirmation of the rating proposal by the rating approver. As a result, each credit
assessment is characterised by the combination of a quantitative approach and an
3.3 Rating process
expert assessment. First, the statistical model that produces the statistical rating is
applied. In a second step, the rating analyst typically confirms or overrules the
statistical
The ICAS rating
rating to come to
process a ratingofproposal.
consists Finally,
a quantitative and the rating proposal
a qualitative stagemust
plusbe the
validated by a second analyst, who also ensures the consistency of
confirmation of the rating proposal by the rating approver. As a result, each credit the ICAS
process
assessment
38 (four-eyes
For a general principle)
is discussion
characterised to yield
by
about thesethe the final
combination
properties, ICAS arating.
ofCommittee
see Basel quantitative approach
on Banking and(2005).
Supervision an
See assessment.
expert also Cesaroni (2015).
First, the statistical model that produces the statistical rating is
TheSee
39
Eurosystem’s guidelines
Table 2 in Section 4. for ICASs pay particular attention to the cornerstones
applied. In a second step, the rating analyst typically confirms or overrules the
of accuracy, consistency and comparability in the rating activity while at the same
statistical rating to come to a rating proposal. Finally, the rating proposal must be
time allowing for some flexibility in the implementation. For instance, concerning the
statistical model, there is a set of quality criteria that have to be met in terms of
ECBFor
38
a general Paper
discussion about
Nothese
284 /properties, see Basel Committee on Banking Supervision (2005).
and calibration accuracy, but the statistical models employed 23
Occasional Series October 2021
discriminatory power
See also Cesaroni (2015).
maySee
39 vary across
Table the ICASs.
2 in Section 4. Furthermore, the framework describes a minimum set of
risk factors to be taken into account, including firm-level financial and risk information
derived from financial statements.
The Occasional
ECB expert analysis takes No
Paper Series into284
account additional
/ October 2021 quantitative and qualitative 23
information not already considered in the statistical model and follows strict rules and
guidelines to ensure the consistency and comparability of rating decisions. Additional
process (four-eyes principle) to yield the final ICAS rating.
The Eurosystem’s guidelines for ICASs pay particular attention to the cornerstones
of accuracy, consistency and comparability in the rating activity while at the same
time allowing for some flexibility in the implementation. For instance, concerning the
statistical model, there is a set of quality criteria that have to be met in terms of
discriminatory power and calibration accuracy, but the statistical models employed
may vary across the ICASs. Furthermore, the framework describes a minimum set of
risk factors to be taken into account, including firm-level financial and risk information
derived from financial statements.
The expert analysis takes into account additional quantitative and qualitative
information not already considered in the statistical model and follows strict rules and
guidelines to ensure the consistency and comparability of rating decisions. Additional
financial information, for example, includes payment incidents, default signals and
legal proceedings for rating decisions. Any adjustment made on the basis of an
expert assessment must be properly documented. Qualitative information impacting
the assigned rating (such as press releases or economic prospects of the branch of
activity of the company) must be precisely detailed and traced in the different rating
tools. In order to avoid any conflict of interest, there are ethics codes that determine
the rules to be followed in case of conflicts of interest (such as the submission of the
rating file to a rating committee collegiate procedure). A rotation mechanism is also in
place so that an analyst does not rate the same company for more than four
consecutive years.
A company’s rating is reviewed every 12 months and is updated when new material
information (such as new financial statement data) becomes available. The rating is
valid for up to 24 months after the closing date of the financial statement used for the
rating.
3.4 Key risk factors

The main goal of the ICAS rating process is to assess in a standardised and
structured way the key risk indicators that affect an enterprise’s ability to meet its
financial obligations when they fall due. In line with industry standards for credit risk
assessment, numerous characteristics are considered when analysing an NFC. The
assessment covers a corporation’s strengths and weaknesses, such as its market
position, its market share or its growth relative to the market. The rating also
considers the legal form and size of the enterprise as well as its links with a parent
and subsidiary companies, i.e. the group structure. The evaluation of the
management may include an opinion on the general quality of management, its
future plans and its track record. The assessment of payment behaviour and access
to external financing such as bank loans, bond markets and stock markets is
reflected in the analysis of financial flexibility. The analysis of the industrial and
economic environment includes the nature of competition in the industry and the
pattern of business cycles.
A key aspect in the rating process is the analysis of financial ratios, which cover all
areas of relevance for analysing financial soundness, i.e. (i) the ability of the
enterprise to generate cash from its operations to meet current financial obligations,
(ii) the balance between its short-term debt and its liquid assets, (iii) the balance
between its total debt and its assets, and (iv) the ability of the enterprise to make
profits. The individual ratios of an enterprise may be compared with reference values
for its industry and/or a peer group of its competitors, and the evolution over time is
also considered. Furthermore, the rating process is tailored to distinguish national
versus international accounting, legal and institutional peculiarities as well as
BANCO DE ESPAÑA 27 DOCUMENTO
industry-specific
OCASIONAL N.º 2131
factors. While statistical models allow for a standardised
assessment of these aspects, the expert analysis serves to identify company-specific
extraordinary effects which might otherwise bias the rating.
(ii) the balance between its short-term debt and its liquid assets, (iii) the balance
between its total debt and its assets, and (iv) the ability of the enterprise to make
profits. The individual ratios of an enterprise may be compared with reference values
for its industry and/or a peer group of its competitors, and the evolution over time is
also considered. Furthermore, the rating process is tailored to distinguish national
versus international accounting, legal and institutional peculiarities as well as
industry-specific factors. While statistical models allow for a standardised
assessment of these aspects, the expert analysis serves to identify company-specific
extraordinary effects which might otherwise bias the rating.
The risk assessment methodology is generally applied to all enterprises in a uniform

way. Nevertheless, differences in the breadth and depth of the analysis of individual
enterprises may prevail depending on the size, legal form and/or industry of that
corporation as a result of differences in data availability.
3.5 Data sources

The primary data source for financial information on NFCs is the final or interim
financial statements. The financial information should cover all relevant activities of
the enterprise and, if applicable, additional financial information on groups and
affiliated enterprises.
ICASs put strong emphasis on using for their analyses only high-quality data from
complete, timely and checked financial statements. To this end, ICASs document in
detail the set of data used in the credit quality assessment process, the information
sources which provide those data, the timetable and frequency of data collection and
the quality control mechanisms in place to ensure on an ongoing basis that the data
are of a sufficiently high quality.
Besides financial statement data, information on the NFC from commercial registers
and other publicly available sources such as private credit bureaus, data providers
and rating assessments from other rating sources is taken into account. In addition,
confidential data available to the Eurosystem such as information from the National
Credit Register and AnaCredit is considered in the ICAS rating process.
3.6 Default definition

ICASs have to identify the default situation of the rated NFCs for all credit
assessment-related tasks (modelling, use and validation). For this purpose, ICASs
make use of the information provided by banks via AnaCredit and the National Credit
Register, as part of which banks must report defaults according to Regulation (EU)
No 575/2013 (CRR). The ICAS default definition relies on Article 178 of the CRR,
which sets forth that a default occurs when a bank considers that the obligor is
unlikely to pay its credit obligations or the obligor is past due more than 90 days on
any material credit obligation to the bank.
The default definition aggregates the whole default information for a given obligor
available to an ICAS to a single default indicator reflecting the materiality of the
default information. The materiality of the default information is calculated by dividing
the aggregated defaulted exposure of a corporation towards banks by the cumulated
total credit exposure of that corporation. Information on default events as well as on
credit exposures is obtained by the ICASs through AnaCredit and/or the National
Credit Register.
Regarding the use of the models, ICASs must monitor their ratings on an ongoing
BANCO DE ESPAÑA
basis.
28 DOCUMENTO One of the relevant aspects to be considered in the monitoring process is the
OCASIONAL N.º 2131
information on the default signals reported monthly to AnaCredit and/or the National
Credit Register. ICASs analyse the updated default information and the potential
impact on credit ratings depending on the intensity of the default signal and adjust
total credit exposure of that corporation. Information on default events as well as on
credit exposures is obtained by the ICASs through AnaCredit and/or the National
Credit Register.
Regarding the use of the models, ICASs must monitor their ratings on an ongoing
basis. One of the relevant aspects to be considered in the monitoring process is the
information on the default signals reported monthly to AnaCredit and/or the National
Credit Register. ICASs analyse the updated default information and the potential
impact on credit ratings depending on the intensity of the default signal and adjust
the rating if needed.
3.7 IT system architecture

The IT system architecture refers to the full range of applications and processes
which support the ICAS rating process. This architecture contributes both to improve
the speed at which information becomes available and hence rating decisions can be
made as well as to reduce the risk of data errors with a high degree of automation.
Furthermore, the IT system architecture ensures several aspects such as the
continuity of the ICAS business, the confidentiality of data, the regular backup of
input and output data of the ICAS and the recording of each step of the credit
assessment process.
Overall, to support a reliable process and a good combination of quantitative and

qualitative approaches, the IT tools must be flexible, contain consistency checks on
qualitative information and ensure the traceability of the analysis conducted by
experts.
3.8 Monitoring and internal validation

ICASs should guarantee that their credit assessment systems are adequate for the
purposes for which they have been designed. This function must be carried out by a
unit independent from those responsible for the development of methodologies and
the rating of entities (preferably in the remit of the risk management divisions or
departments of each NCB).
The validation unit must issue an independent and qualified opinion on the adequacy
of the credit assessment systems both when they are intended to be implemented
and on an ongoing basis once they are in place.
The validation encompasses both quantitative and qualitative elements. From a

quantitative perspective, the validation of the discriminatory power (the ability of the
model to discriminate between good and bad cases, i.e. whether a default will occur
or not) and the correct calibration (whether the rating model is assigning correct PD
estimates to obligors) of the credit assessment systems are particularly relevant. 26
Regarding the qualitative validation, aspects such as the consistency of methods

and data over time, the control procedures in place to ensure the consistency,
accuracy and comparability of credit assessments and the unbiasedness of the
expert system are periodically validated.
The internal ICAS validation at the NCB level is complemented at the Eurosystem
level with an initial one-off validation and the annual performance monitoring
exercise applicable for all ECAF-accepted credit assessment systems as described
in Section 3.9 below.
3.9
BANCO DE ESPAÑA 29
ECAF validation and monitoring
DOCUMENTO OCASIONAL N.º 2131
ICASs are subject to both rigorous one-off validation and ongoing performance
monitoring within the ECAF, in compliance with a set of principles aimed at ensuring
exercise applicable for all ECAF-accepted credit assessment systems as described
in Section 3.9 below.
3.9 ECAF validation and monitoring

ICASs are subject to both rigorous one-off validation and ongoing performance
monitoring within the ECAF, in compliance with a set of principles aimed at ensuring
a minimum level of validation and enhancing comparability between credit
assessment systems.
The one-off validation is carried out in the context of the initial acceptance of the
system or when the NCBs request a significant change or an extension of an already
accepted ICAS. It entails a range of quantitative and qualitative analyses aimed at
assessing the accuracy of the risk estimates, the validity of the processes used to
produce these estimates and the effectiveness of the control procedures in place to
ensure the accuracy of the estimates over time.
On an ongoing basis, ICASs are requested to have systematic approaches in place

for the early detection of any deficiencies in the system. In this regard, the
models/methods used undergo yearly performance monitoring and should be
recalibrated once a year if the performance monitoring indicates that this is
necessary.
Like all ECAF-accepted credit assessment systems, ICASs are subject to the ECAF
performance monitoring process (see Section 2.2). The quantitative component of
this performance monitoring consists of a single-period (annual) and a multi-period
(five-year) back-testing rule to check if the realised default rate of the assessed
credit assessment system is within a tolerable range of each CQS’s respective PD
threshold. In case of deviations, the mapping of the ICASs’ rating grades to the
harmonised Eurosystem rating scale is adapted.
To complement the ECAF performance monitoring, ICAS NCBs have to submit to the
ECB on an annual basis (i) the results of a minimum level of information on the
internal model validation for ICASs (the tests should ideally be conducted for the
statistical and final ratings), and (ii) the assessment of the unbiasedness of the
expert system that incorporates qualitative information in the overall assessment.
Moreover, in order to ensure transparency and to enable continued monitoring, ICAS

NCBs should provide the ECB annually with an updated version of the minimum
documentation
ECB that they
Occasional Paper Seriesmaintain for ECAF
No 284 / October purposes, and which describes the rating
2021 27
processes and methodologies of the system. This documentation should be
accompanied by a concise summary of any updates to the ICAS’s methodologies
that took place since the beginning of the year or that are anticipated in the near
future, as well as recommendations of possible audits and action plans.

4
4 National
National ICASs
ICASs –
– features
features and
and cross-
cross-
comparison
comparison
This section summarises how all ICASs comply with the set of requirements outlined
This section summarises how all ICASs comply with the set of requirements outlined
in Section 3 and how each ICAS differs in terms of its specific implementation, within
in Section 3 and how each ICAS differs in terms of its specific implementation, within
the bounds set by Eurosystem requirements. More detailed descriptions of the
the bounds set by Eurosystem requirements. More detailed descriptions of the
individual ICASs’ features are included in the annex.
individual ICASs’ features are included in the annex.
For all ICASs, the credit rating refers to a PD over a one-year prediction horizon,
For all ICASs, the credit rating refers to a PD over a one-year prediction horizon,
which is in most cases a point-in-time estimate resulting from the statistical model,
which is in most cases a point-in-time estimate resulting from the statistical model,
with a more forward-looking through-the-cycle perspective after applying the expert
with a more forward-looking through-the-cycle perspective after applying the expert
analysis.
analysis.
The PD estimates are categorised into risk classes on the internal rating scale. For
The PD estimates are categorised into risk classes on the internal rating scale. For
monetary policy purposes, the ratings are mapped to the CQSs of the Eurosystem
monetary policy purposes, the ratings are mapped to the CQSs of the Eurosystem
harmonised rating scale.
harmonised rating scale.
All ICASs only use timely available data. The balance sheet information used for the
All ICASs only use timely available data. The balance sheet information used for the
assessment must not be older than 18 months.
assessment must not be older than 18 months.
In addition, all rely on credit register data. Additional credit register information such
In addition, all rely on credit register data. Additional credit register information such
as credit history and utilisation of credit lines is used by all ICASs in the expert
as credit history and utilisation of credit lines is used by all ICASs in the expert
system, while three ICASs (the BdI, the BdE and BS) also use it as an input for the
system, while three ICASs (the BdI, the BdE and BS) also use it as an input for the
statistical model. The ICASs using the Common Credit Assessment system (CoCAS;
statistical model. The ICASs using the Common Credit Assessment system (CoCAS;
currently the OeNB and the BBk) also take into account rating data from other
currently the OeNB and the BBk) also take into account rating data from other
sources in the calibration process.
sources in the calibration process.
The rating process is composed of a statistical model stage as well as an expert
The rating process is composed of a statistical model stage as well as an expert
analysis stage. Within such boundaries, each ICAS differs in terms of its specific
analysis stage. Within such boundaries, each ICAS differs in terms of its specific
implementation.
implementation.
In terms of statistical model choice, the logistic regression is a common underlying
In terms of statistical model choice, the logistic regression is a common underlying
feature across the different approaches, as well as the use of different sub-models
feature across the different approaches, as well as the use of different sub-models
accounting for industry sectors. In particular, ICASs can be divided into two main
accounting for industry sectors. In particular, ICASs can be divided into two main
categories: those following a pure logistic regression approach (the BdE, the BdF,
categories: those following a pure logistic regression approach (the BdE, the BdF,
the BdI, BS and the BdP) and those using a common proprietary approach named
the BdI, BS and the BdP) and those using a common proprietary approach named
CoCAS (the OeNB and the BBk). Overall, the first group of NCBs opted for a logistic
CoCAS (the OeNB and the BBk). Overall, the first group of NCBs opted for a logistic
regression approach due to its better readability for the analysts in charge of the
regression approach due to its better readability for the analysts in charge of the
expert assessment stage. The CoCAS approach of the second group is based on a
expert assessment stage. The CoCAS approach of the second group is based on a
combination of consensus methodology and linear regression, with a view to ensure
combination of consensus methodology and linear regression, with a view to ensure
that the results are close to the market opinion. Further research is in progress
that the results are close to the market opinion. Further research is in progress
among some NCBs regarding the use of more recent approaches (such as machine
among some NCBs regarding the use of more recent approaches (such as machine
learning) for credit risk estimation.
learning) for credit risk estimation.
The expert system always encompasses some basic analysis profiles such as
The expert system always encompasses some basic analysis profiles such as
financial statement, sector and business risk, and group and third-party analyses;
financial statement, sector and business risk, and group and third-party analyses;
some analysis profiles (trend or benchmarking analysis) are instead assessed by
some analysis profiles (trend or benchmarking analysis) are instead assessed by
some NCBs only. The integration of ESG factors in the ICAS methodology is in
progress among the ICAS NCBs, and some of them have already started to include
relevant ESG indicators in the rating process (see Box 2). Based on the four-eyes
analysts is included in all the 29
principle, a control
ECB Occasional Paperstep carried
Series No 284out by experienced
/ October 2021 29
ICASs’ processes to strengthen the assessment.
The number of ratings produced for ordinary monetary policy operations (including
both quantitative and expert analysis) differs significantly across ICASs, spanning
from hundreds to several thousands. A few ICASs also produce purely quantitative
some NCBs only. The integration of ESG factors in the ICAS methodology is in
progress among the ICAS NCBs, and some of them have already started to include
relevant ESG indicators in the rating process (see Box 2). Based on the four-eyes
principle, a control step carried out by experienced analysts is included in all the
ICASs’ processes to strengthen the assessment.
The number of ratings produced for ordinary monetary policy operations (including
both quantitative and expert analysis) differs significantly across ICASs, spanning
from hundreds to several thousands. A few ICASs also produce purely quantitative
ratings that can be used, besides economic analysis purposes, for those monetary
policy operations foreseen by temporary frameworks or extraordinary monetary
policy measures (see Box 1).
From an organisational perspective, the cross-ICAS comparison shows some

differences in terms of the functional unit in which the ICAS activity is conducted
(market operations, risk control, statistics, etc.). Five ICASs produce ratings from a
different operational unit than the one in charge of the development of
methodologies. The same applies for the reliance on central banks’ local branches,
with some ICASs following a decentralised approach and others relying only on the
central bank’s headquarters only.
The annex presents a detailed description of each of the seven ICASs, highlighting
specificities as well as similarities in their approaches. Table 2 summarises the main
findings of this comparison.
Table 2
Cross-comparison of the main features of ICASs
OeNB BBk BdE BdF BdI BdP BS
Prediction 1 year 1 year 1 year 1 year 1 year 1 year 1 year

horizon of
credit rating
Output
Point-in-time/ PIT PIT PIT/TTC PIT/TTC PIT/TTC PIT PIT/TTC

through-the-cycle
Rating scale 20 20 21 21 19 20 14
(number of grades)
Quantitative Consensus Consensus Fractional Segmentation Logit model Logit Logistic

assessment approach approach logistic algorithms models regression
approach regression and adjusted
logistic
Methodology
regression
Number of different 12 12 4 12 6 11 2
sector models
Categories 8 8 5 15 8 7 4
considered in
human analysis
Number of 7,000 26,000 500 270,000 4,000 250 500

Production
full ratings
Number of - - ~950,000 - 350,000 38,000 30,000

statistical ratings
Development of Statistics Directorate Rating Corporate Risk Statistics Banking

methodologies Department - General Methodolo- Methodology Management Department Supervision
Model Markets gies Unit Division Directorate - Sectorial
Development (Financial Analysis
and Risk Unit
Secondary Department)
Organization
Statistics Unit
Rating of Statistics Regional Rating Branches Branches Statistics Banking

entities Department - offices Assessment and Risk Department Supervision
Statistical Unit Management - Credit
Analysis and (Financial Directorate Assessment
ICAS Unit Risk Unit
Department) 30
Involved 1 9 - 115 15 1 -
branches
Box 2
ESG factors and ICAS ratings
There is a growing general consensus that ESG risk factors may have a relevant impact on credit
Involved 1 9 - 115 15 1 -
branches
Box 2
ESG factors and ICAS ratings
Incorporating ESG factors into credit ratings and disclosing which factors are relevant and material
There is a growing general consensus that ESG risk factors may have a relevant impact on credit
for a rating assignment may not be straightforward in a context of limited availability of sufficiently
risk: ESG factors, including climate change risks, can affect borrowers’ cash flows and the likelihood
harmonised and homogeneous data to be used for a statistical analysis.
that they default on debt obligations.
To face this challenge, some ICASs have started collecting green finance data, drawing also on
ESG-based approaches, which assess the performance of a company in relation to ESG criteria,
financial statements that refer, for example, to CO2 emissions where available, as well as ad hoc
add value by providing information that traditional financial analysis does not take into
questionnaires. In other cases, information on this topic is collected through interviews with
consideration: these non-financial elements may have a significant impact on the market position or
companies, the analysis of their sustainability, corporate governance and audit reports, sector
even the solvency of a company, especially in a long-term forward-looking perspective. To this
analysis, and the assessment of key performance indicators. The improved information availability
effect, ICASs have already been working on achieving a consistent and adequate measurement
expected from the introduction of the Corporate Sustainability Reporting Directive will widen the
and incorporation of ESG factors into credit ratings, and substantial progress is envisaged.
possibilities to include environmental considerations in the ICAS ratings.
Currently, ICASs have heterogeneous approaches towards the incorporation or consideration of
Current efforts by ICASs focus on the selection of ESG indicators to be included in the statistical
ESG factors within their rating models and methodologies. When environmental factors are
model or in the expert model; for example, within the latter, ESG factors may be fully incorporated in
included in the rating methodologies, this is usually done within the expert assessment.
the system of soft indicators by standing as a category on their own. The ECB will consider
Incorporating ESG factors into credit ratings and disclosing which factors are relevant and material
developing minimum standards for the incorporation of climate change risks into its internal
for a rating assignment may not be straightforward in a context of limited availability of sufficiently
ratings. 40
harmonised and homogeneous data to be used for a statistical analysis.
To face this challenge, some ICASs have started collecting green finance data, drawing also on
financial statements that refer, for example, to CO2 emissions where available, as well as ad hoc
questionnaires. In other cases, information on this topic is collected through interviews with
companies, the analysis of their sustainability, corporate governance and audit reports, sector
analysis, and the assessment of key performance indicators. The improved information availability
expected from the introduction of the Corporate Sustainability Reporting Directive will widen the
possibilities to include environmental considerations in the ICAS ratings.
Current efforts by ICASs focus on the selection of ESG indicators to be included in the statistical
model or in the expert model; for example, within the latter, ESG factors may be fully incorporated in
the system of soft indicators by standing as a category on their own. The ECB will consider
developing minimum standards for the incorporation of climate change risks into its internal
ratings. 40
40
See the press release in which the ECB presents its action plan to include climate change
considerations in its monetary policy strategy
(https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html).

5 Conclusion
This paper analyses in detail the role of ICASs in the context of the Eurosystem’s
monetary policy operations. ICASs are an important tool for the effective credit risk
management of loans to NFCs accepted as collateral in Eurosystem credit
operations. They contribute to the transmission of monetary policy not least in times
of crisis and are used also for other purposes, such as macroprudential and
microprudential supervision.
The paper also describes the Eurosystem’s guidelines and requirements for ICASs
in terms of, inter alia, the estimation of default probabilities, the role of statistical
models versus expert analysis, input data, validation analysis and performance
monitoring. To complete the comprehensive overview on ICASs, the main features of
each of the ICASs currently accepted by the Eurosystem as credit assessment
systems are explained, and similarities and differences are highlighted. The number
and relevance of ICASs for the Eurosystem may further increase in the future, also in
the context of the Eurosystem’s envisaged work to incorporate climate change in risk
assessments.

Annex – Features of national ICASs
A.1 Oesterreichische Nationalbank (OeNB)
A.1.1 Statistical model
Overview
The OeNB uses CoCAS, a joint project with the BBk for its ICAS. CoCAS consists of
a novel estimation procedure used to calibrate the statistical models as well as an IT
platform to manage the workflow and integrate the expert system. The providers
(BBk and OeNB) offer the system to interested Eurosystem NCBs. The BBk and
OeNB have fully harmonised the calibration process of the statistical models and
pool their data. This leads to a common model for financial statements following the
International Financial Reporting Standards (IFRS) and 11 common models for
different economic sectors of financial statements according to the national generally
accepted accounting principles (nGAAP). After the calculation of the statistical
model’s rating proposal, which takes into account balance sheet information, an
expert analysis is carried out which incorporates additional quantitative as well as
qualitative data. The output of the ICAS at each stage is an issuer-specific rating
class associated with a point-in-time, one-year PD.
Calibration approach and data
The CoCAS models are estimated on the basis of the proprietary consensus
methodology, which, in addition to default data, also takes into account rating data
from other rating sources in the calibration process to improve the predictive power
of the credit risk model.
In a first step, the biases inherent in the rating data from different sources are
corrected via a mixed effects model, leading to a consensus rating for each balance
sheet. In a second step, the consensus rating is explained in a linear regression
using balance sheet information. In the last step, the predictions from step two are
compared with the realised default rates, and the level of the PD estimates is
adjusted if needed.
For each model, a five-year rolling window of the data is used and the models are
regularly recalibrated. The score produced by the model is mapped to the rating
classes and serves as input for the expert system.
Expert assessment
The starting point for the expert analysis is the statistical rating, which is based on
the most recent financial statements of the NFC or group. The expert analysis is
structured into eight categories (“company/market”, “balance sheet and income
statement”, “statistical model”, “trend analysis”, “benchmarking model”,
BANCO DE ESPAÑA
“ownership/holding
structure”, “additional information” and “opinion of third parties”).
For each category, the analyst can assign an upgrade by one notch, a downgrade by
one notch or no change. The outcomes for each category are summed up and
added to the statistical rating, which yields the individual or group rating. For legal
Expert assessment
The starting point for the expert analysis is the statistical rating, which is based on
the most recent financial statements of the NFC or group. The expert analysis is
structured into eight categories (“company/market”, “balance sheet and income
statement”, “statistical model”, “trend analysis”, “benchmarking model”,
“ownership/holding structure”, “additional information” and “opinion of third parties”).
For each category, the analyst can assign an upgrade by one notch, a downgrade by
one notch or no change. The outcomes for each category are summed up and
added to the statistical rating, which yields the individual or group rating. For legal
entities belonging to a group, the rating of the group is subsequently considered as a
rating ceiling for the stand-alone rating, i.e. the individual entity cannot be rated
better than the group. In addition, the stand-alone rating is upgraded by up to three
notches in case the group rating is better. Following the rating analysis by the
analyst, the rating must be approved by a senior analyst in order to comply with the
four-eyes principle. If the analyst and the approver come to diverging conclusions or
relevant information cannot be sufficiently reflected in the standardised rating
process, the rating is forwarded to the rating committee, which takes a decision. As
part of the expert system, information on climate change-related risk factors (e.g.
CO2 emissions) is collected.
Model validation
The validation of the OeNB’s ICAS covers the prerequisites set forth in the
Eurosystem’s internal requirements plus additional procedures. The validation
function assesses the calibration quality and the discriminatory power based on the
statistical models as well as on the final ratings in out-of-sample analyses. The
validation function is involved in all steps of the calibration process, from data
preparation to model selection and model implementation, and advises on further
improvements. In addition, the OeNB’s Internal Audit Department performs triannual
audits which, as well as comprising an overall assessment also focus on a specific
component of the ICAS. For the expert analysis, the OeNB applies a rotation
mechanism such that an entity cannot be rated more than four consecutive times by
the same analyst. After that, a banning period of one year applies.
A.1.2 Organisation
Scope of rated entities
The OeNB’s ICAS assesses around 4,300 NFCs per year (leading to around 7,000
ratings), and ratings are supplied either at the request of the NFC or a bank, or on
the initiative of the OeNB. A prerequisite is the availability of comprehensive high-
quality information (e.g. balance sheet data), while the priority for establishing a
rating depends on the size of the NFC.
Set-up
The OeNB’s ICAS is part of its risk management function, which is distributed over
several organisational units. The responsibility for the OeNB’s ICAS including the
collection of financial statement data lies with the Statistics Department in the
Supervisory Statistics, Models and Credit Quality Assessment (SAMBA) Division,
while the Statistics – Data Governance, Master Data and Bank Resolution Division
supports the ICAS in the collection of credit register and master data. Within the
OCASIONAL N.º 2131
SAMBA Division, a separation of duties between model development, credit

assessment and validation is ensured by assigning these tasks to different units. In
addition, OeNB West (a branch located in Innsbruck) contributes to the credit
The OeNB’s ICAS is part of its risk management function, which is distributed over
several organisational units. The responsibility for the OeNB’s ICAS including the
collection of financial statement data lies with the Statistics Department in the
Supervisory Statistics, Models and Credit Quality Assessment (SAMBA) Division,
while the Statistics – Data Governance, Master Data and Bank Resolution Division
supports the ICAS in the collection of credit register and master data. Within the
SAMBA Division, a separation of duties between model development, credit
assessment and validation is ensured by assigning these tasks to different units. In
addition, OeNB West (a branch located in Innsbruck) contributes to the credit
assessment as well as the data collection.
A.2 Deutsche Bundesbank (BBk)
Overview
The BBk uses CoCAS, a joint project with the OeNB for its ICAS. CoCAS consists of
a novel estimation procedure used to calibrate the statistical models as well as an IT
platform to manage the workflow and integrate the expert system. The providers
(BBk and OeNB) offer the system to interested Eurosystem NCBs. The BBk and
OeNB have fully harmonised the calibration process of the statistical models and
pool their data. This leads to a common model for financial statements following the
IFRS and 11 common models for different economic sectors of financial statements
according to the nGAAP. After the calculation of the statistical model’s rating
proposal, which takes into account balance sheet information, an expert analysis is
carried out which incorporates additional quantitative as well as qualitative data. The
output of the ICAS at each stage is an issuer-specific rating class associated with a
point-in-time, one-year PD.
The CoCAS models are estimated on the basis of the proprietary consensus
methodology, which, in addition to default data, also takes into account rating data
from other rating sources in the calibration process to improve the predictive power
of the credit risk model.
In a first step, the biases inherent in the rating data from different sources are
corrected via a mixed effects model, leading to a consensus rating for each balance
sheet. In a second step, the consensus rating is explained in a linear regression
using balance sheet information. In the last step, the predictions from step two are
compared with the realised default rates, and the level of the PD estimates is
adjusted if needed.
For each model, a five-year rolling window of the data is used and the models are
Expert assessment
BANCO DE ESPAÑA 37 In the expert assessment, the analysts of the regional offices of the BBk examine
additional information not covered by the models in order to determine the final rating
class. A scoring method is used to ensure a consistent approach across all regional
offices and to contribute to the greater transparency and comprehensibility of the
Expert assessment
In the expert assessment, the analysts of the regional offices of the BBk examine
additional information not covered by the models in order to determine the final rating
class. A scoring method is used to ensure a consistent approach across all regional
offices and to contribute to the greater transparency and comprehensibility of the
final credit assessment.
There are eight predefined categories to be taken into account during the expert
analysis: (1) quality of corporate management, (2) market and sector information,
(3) reliance on third parties, (4) significant ratio-distorting one-off effects and special
factors, (5) the relative market position and trends of the enterprise, (6) current
developments, (7) other enterprise-specific information and (8) third-party opinions.
Besides the eight categories, defaults reported to AnaCredit and the National Credit
Register are also considered. In addition, the rating is subject to the overall
assessment of any group to which the enterprise belongs. A ninth category
considering ESG aspects is currently being developed in order to integrate ESG-
related risks and opportunities in the rating assessment process. To date, these
aspects have been considered separately in the three categories of management,
market and sector information and other enterprise-specific information, wherever
they were available. As part of the expert system, information on CO2 emissions is
also collected, with the aim of eventually incorporating this in future models.
The starting point for the expert assessment is the rating class proposal computed
by the statistical model. For each of the eight categories to be evaluated, the analyst
decides whether the aspects justify a deviation from the proposal. For each category,
the analyst can assign an upgrade by one notch, a downgrade by one notch or no
change. The outcomes for each category are summed up and added to the statistical
rating, which yields the individual or group rating. For legal entities belonging to a
group, the rating of the group is subsequently considered as a rating ceiling for the
stand-alone rating, i.e. the individual entity cannot be rated better than the group. In
addition, the stand-alone rating is upgraded by up to three notches in case the group
rating is better. The sum of these deviations and after applying the group and default
framework results in the final rating class.
Following the rating analysis by the analyst, the rating must be approved by a senior
analyst in order to comply with the four-eyes principle. If the analyst and the
approver come to diverging conclusions or relevant information cannot be sufficiently
reflected in the standardised rating process, the rating is forwarded to the rating
committee, which takes a decision.
A rating committee is involved in particular in the following cases: disagreeing

viewpoints about the credit assessment, enterprises of supraregional importance
(turnover of more than €1 billion) or a change of the eligible status.
Model validation
The models are validated on a yearly basis as well as occasionally. To this end, the
discriminatory power and the calibration quality of both the statistical models and the
final ratings (after expert assessment) are assessed. Tests are conducted on an in
and out-of-sample basis.
The validation of the BBk’s ICAS covers the prerequisites set forth in the
statistical models as well as on the final ratings in out-of-sample analyses.
discriminatory power and the calibration quality of both the statistical models and the
final ratings (after expert assessment) are assessed. Tests are conducted on an in
and out-of-sample basis.
The validation of the BBk’s ICAS covers the prerequisites set forth in the
statistical models as well as on the final ratings in out-of-sample analyses.
In addition, the BBk’s Internal Audit Department performs annual to triannual audits
which, as well as comprising an overall assessment, also focus on a specific
component of the ICAS. For the expert analysis, the BBk applies a rotation
mechanism such that an entity cannot be rated more than four consecutive times by
the same analyst. After that, a banning period of one year applies.
A.2.2 Organisation
The BBk collects approximately 26,000 financial statements per year, around 800 of
which are the leading legal entities of a company group delivering consolidated
financial statements according to the IFRS, and around 2,700 of which are the
leading legal entities of a company group delivering consolidated financial
statements according to the nGAAP. Around 7,000 assessed financial statements
are from members of a group.
Of the companies assessed in 2019, around 13,000 were individual companies

which had a valid rating from the BBk at the beginning of the year, i.e. they belonged
to the non-financial sector, they were not previously in default, they had delivered a
full annual financial statement according to the German Commercial Code or IFRS,
and they had undergone a complete credit risk assessment procedure and received
a final rating.
Set-up
The ICAS of the BBk is located at its central head office as well as its regional
offices. Within the central head office, Directorate General Markets, Policy Issues
relating to Monetary Policy Implementation Division, the section “Credit Risk
Assessment” is responsible for ICAS-related tasks such as model development,
definition of the system framework as well as the rules and procedures for the credit
risk
ECB assessment process.
The credit risk assessment of entities is performed at the BBk’s regional offices.
Within each of the nine regional offices, there are units responsible for the credit
assessment and the securities. The size of the individual units in the regional offices
differs according to the size of the respective area of responsibility and the number
of corporations assessed.
In December 2016, the Risk Control Division at the central head office took over full
responsibility for validation and performance monitoring.
A.3 Banco de España (BdE)


In December 2016, the Risk Control Division at the central head office took over full
responsibility for validation and performance monitoring.
A.3 Banco de España (BdE)
Overview
The BdE’s ICAS rating model comprises a statistical and an expert stage. The first
provides an automatic rating based on the most recent financial statements of the
company. In the second, the analyst incorporates in the final rating of the company
all relevant aspects that the statistical model has not been able to capture.
The output of the BdE’s ICAS is an issuer-specific rating on a credit rating scale
consisting of 21 classes, where each rating class has an associated one-year PD.
The BdE’s ICAS estimates fractional logistic regressions to order the firms based on
their credit quality using a score calculated as a linear combination of a series of
financial ratios. The financial ratio composition and their weights are different
depending on the type and the economic sector of the company. Regarding the type
of the company, different statistical models are considered for groups and individual
companies based on their consolidated or stand-alone financial statements,
respectively. Additionally, the statistical model for the construction sector differs from
the one developed for other sectors.
In a second phase, the risks associated with the statistical assessments provided by
the fractional logistic regressions are quantified to reflect the NFCs’ one-year PD.
The calibration of the one-year PD uses as its main element the historical annual
default rates observed in the five-year time span of the statistical models. The scores
are grouped in a finite set of ranges, differentiated by the level of defaults observed
in each interval. These levels are used to tie an estimated PD to each set of ranges
and assign it to the corresponding rating class in the BdE’s ICAS master scale.

Expert assessment
The proposed automated assessment from the statistical model is supplemented

with more recent and forward-looking information gathered by the analysts.
Economic or business events that are not contained in the financial statements due
to a time lag between the date in which the statements were closed and when the
events are communicated to the public can thus be taken into account. This is
especially relevant when there are significant effects due to a sudden disruption.
Guidelines have been developed for credit analysts to assess each area, aiming at a
uniform approach to the analysis, a minimum coverage of all relevant aspects and
clear traceability of the final result. This methodological framework is important to
have a homogeneous and consistent model among analysts. The BdE’s ICAS expert
model involves the analysis of five blocks or areas, and the effect of each area is
applied sequentially.
1. Statistical model analysis. This assesses the accuracy and consistency of
the financial data used for the ratio calculation and takes into consideration
one-off effects as well as comprehensive adjustments to complete the set of
financial statements.
Guidelines have been developed for credit analysts to assess each area, aiming at a
uniform approach to the analysis, a minimum coverage of all relevant aspects and
clear traceability of the final result. This methodological framework is important to
have a homogeneous and consistent model among analysts. The BdE’s ICAS expert
model involves the analysis of five blocks or areas, and the effect of each area is
applied sequentially.
1. Statistical model analysis. This assesses the accuracy and consistency of

the financial data used for the ratio calculation and takes into consideration
one-off effects as well as comprehensive adjustments to complete the set of
2. Financial risk profile. This complements the financial information taken into
account in the statistical model. Less easily quantified indicators are
assessed, such as trends, financial flexibility and financial contingencies not
reflected in the balance sheet.
3. Business risk profile. Some specific characteristics of the sector(s) in which

the company operates are assessed in order to determine of the proper
development of its industrial activity as well as its competitive position.
4. Management risk profile. The quality of the management and the corporate
governance are reviewed. Audit reports or penalties are used by the
analysts as evidence for this risk.
5. Other information. This block allows for the review of any additional
information (where available and significant) that may be relevant.
The analysis of the five blocks or areas of assessment makes up the stand-alone
rating of the companies assessed. The analyst has to determine a risk score for
each of the indicators assessed independently, following specific guidelines. Each
indicator has a fixed weight, and the risk scores assume different levels of risk for
each profile. The final score of the different profiles results in either an upgrade or a
downgrade depending on a rating matrix. This assessment covers all ESG indicators
with an impact on the credit risk of an NFC. The factors are incorporated in the
financial risk profile, business risk profile, management risk profile and other
information. It is important to highlight that these ESG factors are considered insofar
as they could have an impact on NFCs’ financial risk (in this case, credit risk). In this
sense, short-term risks will always be more easily identifiable than long-term risks,
for which the uncertainty of occurrence increases. This analysis is complemented
with an assessment of (i) the interdependencies within the group, including the
degree of relationship between an affiliate and its parent company and whether
belonging to a group could have a potential impact on a company’s credit quality;
and (ii) the impact of additional alerts (information received from the National Credit
Register, external providers, IRB systems and ECAIs). All the above results in the
final rating proposed by the analyst. The credit assessment for each of the
companies analysed must be discussed and approved by a supervisor (following the
four-eyes principle). Each rating is also discussed and approved by a rating
committee.
Model validation
The validation of the BdE’s ICAS covers, on an ongoing basis, both the quantitative
and the qualitative part of the credit assessment system. Quantitative validation
comprises all validation procedures in which statistical indicators for the rating are
calculated and interpreted on the basis of an empirical dataset. Aspects such as
discriminatory power and the calibration of the statistical models and final ratings are
essential in this part of the validation. Additionally, the analysis of the impact of the
OCASIONAL N.º 2131
expert model on the final ratings is also covered in this part of the validation. In
contrast, qualitative validation ensures the applicability and proper application of the
quantitative methods in practice and mainly focuses on model design, data quality
The validation of the BdE’s ICAS covers, on an ongoing basis, both the quantitative
and the qualitative part of the credit assessment system. Quantitative validation
comprises all validation procedures in which statistical indicators for the rating are
calculated and interpreted on the basis of an empirical dataset. Aspects such as
discriminatory power and the calibration of the statistical models and final ratings are
essential in this part of the validation. Additionally, the analysis of the impact of the
expert model on the final ratings is also covered in this part of the validation. In
contrast, qualitative validation ensures the applicability and proper application of the
quantitative methods in practice and mainly focuses on model design, data quality
and the internal use of the rating system.
A.3.2 Organisation
The assessment scope of the BdE's ICAS encompasses large NFCs, both economic
groups and individual companies. In order to use its resources more efficiently, the
BdE’s ICAS assesses NFCs with higher credit quality and higher volumes of credit
claims. Upon specific request, the BdE’s ICAS also assesses those NFCs whose
credit claims are being used, or are likely to be used in the short term, by a
counterparty. The BdE’s ICAS assesses around 500 NFCs annually. In addition,
“purely statistical” PDs are available for around 950,000 NFCs.
Set-up
The BdE’s ICAS is currently hosted by the Financial Risk Department, which belongs
organisational
to the Directoratestructure
General of Operations,
the BdE’s ICAS is composed
Markets and Payment of three units. InThe
Systems. particular,
organisational
the Credit Assessment Unit (CA Unit) is responsible for the assessment ofparticular,
structure of the BdE’s ICAS is composed of three units. In
organisational structure of the BdE’s ICAS is composed of three units. In particular,
the Credit Assessment
companies, Unit (CA Unit) isUnit
the Rating Methodologies responsible
(RM Unit)for forthe
theassessment
development of of rating
the Credit Assessment Unit (CA Unit) is responsible for the assessment of
companies, the Rating Methodologies Unit (RM Unit) for the development
methodologies and the Validation and Monitoring Unit (VM Unit) for the validation of ratingof
companies, the Rating Methodologies Unit (RM Unit) for the development of rating
methodologies
the and The
rating process. the Validation
CA Unit and and Monitoring
the RM Unit fallUnitunder
(VM Unit) for the
the same validation
division sinceof
methodologies
ECB and the
Occasional Paper Validation
Series and Monitoring
No 284 / October 2021 Unit (VM Unit) for the validation of41
the rating
they process.to
are expected The CA Unit and
complement theother
each RM Unit fallimplementation
in the under the sameofdivision
the BdE’s since
the rating process. The CA Unit and the RM Unit fall under the same division since
they are expected to complement each other in the implementation
ICAS. However, the VM Unit has been assigned to a different division within the of the BdE’s
they are expected to complement each other in the implementation of the BdE’s
ICAS. However,
Financial the VM Unit
Risk Department in has been
order assigned
to achieve to a different
a clear division
and effective within the of
differentiation
ICAS. However, the VM Unit has been assigned to a different division within the
Financial Risk
functions, Department
as currently in order
required to achieve
by the ECAF. To a clear and effective
that extent, differentiation
the three units are of
Financial Risk Department in order to achieve a clear and effective differentiation of
functions,
managed by as different
currentlypersonnel,
required byand thedifferent
ECAF. To thatmembers
staff extent, the three
have beenunits are
allocated to
functions, as currently required by the ECAF. To that extent, the three units are
managed
the by different personnel, and different staff members have been allocated to
three processes.
managed by different personnel, and different staff members have been allocated to
the three processes.
the
Thethree
BdE’sprocesses.
ICAS is centralised at the bank’s main premises, and no branch is
The BdE’s
involved in ICAS is centralised
the ICAS assessment. at the bank’s main premises, and no branch is
The BdE’s ICAS is centralised at the bank’s main premises, and no branch is
involved in the ICAS assessment.
involved in the ICAS assessment.
A.4 Banque de France (BdF)

A.4
A.4 Banque
Banque de
de France
France (BdF)
(BdF)
Overview
Overview
Overview
The BdF’s “theme-based catch-up mechanism” underlying its rating model is built on
Thebasis
the BdF’sof“theme-based
a statistical and catch-up mechanism”
an expert underlying
assessment. its ratingrating
The statistical model is built on
the basis of a assigns
methodology statistical and an expert
a one-year assessment.
point-in-time PD toThe statistical
a company ratingon the
based
the basis of a statistical and an expert assessment. The statistical rating
methodology assignsdata
analysis of firm-level a one-year
from thepoint-in-time PD to a company
previous accounting period. To based
obtainonathe
final
methodology assigns a one-year point-in-time PD to a company based on the
BANCO DE ESPAÑA analysis
42 DOCUMENTO
rating, ofexpert
the
OCASIONAL firm-level
N.º 2131 data from
analysis the previous
incorporates accounting
an additional period. To obtain
through-the-cycle a final
component to
analysis of firm-level data from the previous accounting period. To obtain a final
rating, the expert
the statistical analysis
rating incorporates
by integrating an additionalassessment
a forward-looking through-the-cycle component
in the analysis. to
The
rating, the expert analysis incorporates an additional through-the-cycle component to
the statistical rating by integrating a forward-looking assessment
output of the BdF’s ICAS is an issuer-specific rating on a credit rating scale in the analysis. The
the statistical rating by integrating a forward-looking assessment in the analysis. The
output of the
consisting of BdF’s ICAS is an issuer-specific rating on a credit rating scale
21 classes.
output of the BdF’s ICAS is an issuer-specific rating on a credit rating scale
Overview
the basis of a statistical and an expert assessment. The statistical rating
methodology assigns a one-year point-in-time PD to a company based on the
analysis of firm-level data from the previous accounting period. To obtain a final
rating, the expert analysis incorporates an additional through-the-cycle component to
the statistical rating by integrating a forward-looking assessment in the analysis. The
output of the BdF’s ICAS is an issuer-specific rating on a credit rating scale
consisting of 21 classes.
The overall model comprises three sub-models (“approaches”): small firms, larger
firms and consolidated groups. For the first two sub-models, seven economic sectors
are identified, while for the consolidated group sub-model, the BdF identifies only five
sectors. Within each sub-model, each sector is assessed separately. The financial
ratios used may vary depending on the approach used for rating and the economic
sector identified, their discriminatory power vis-à-vis the default indicator and their
economic relevance. Specific rules also apply for holdings and real estate promoters.
The entire rating procedure is structured in three core stages that encompass a
statistical and an expert assessment.
(i) The first step consists of a quantitative analysis based on a statistical rating model
that uses balance sheet data. The model relies on four different steps. The first step
is a variable selection process. The second is an optimisation algorithm that clusters
the selected financial ratios into four themes and splits each ratio into multiple risk
classes. The third step consists of a penalised logistic regression with coefficient
adjustments that estimates an unbiased PD of NFCs. The fourth step relates the
underlying PD with a rating class (i.e. statistical rating) through the definition of a
ECB Occasional
master Paper Series
scale based on theNo 284 / October
inverse 2021
function of a smoothing cubic spline and an 42
optimisation algorithm.
Financial ratios are selected according to two criteria: high discriminatory power in
predicting defaults and financial relevance. The finally selected financial ratios are
clustered into four different financial themes (or axes), i.e. profitability, financial
autonomy, financial structure and liquidity, with each ratio being assigned to a single
theme. For each theme, the ratios are then discretised into (ratio-specific) risk
classes based on an algorithm similar to decision trees. At the end of this stage,
each company is characterised by its allocation to four classes (one for each theme)
according to the position of its financial ratios with respect to the unique combination
of thresholds defined to segment the optimal theme-based classes. During the rating
procedure, the expert can select a different risk class for a given company than the
one automatically obtained with the algorithm.
In the subsequent logistic regression, the dependent variable is the default indicator,
which is a binary variable following a Bernoulli distribution. The explanatory variables
are the risk classes of the four aforementioned financial themes. These explanatory
variables are categorical variables, which are modelled with dummies (i.e. one
dummy for each risk class, under each theme) in order to allow the model to adapt to
non-linear effects of the explanatory variables. Given the limited sample size of
defaulted companies used for the model calibration and the quasi-separation of data
in some samples, the BdF’s ICAS uses an adjusted logistic regression (i.e. Firth’s
logistic regression with intercept correction and prudential adjustment), which uses a
two-step estimation to ensure unbiased predicted probabilities while leaving
unaltered the bias-corrected effect estimates. The first step consists of a logistic
regression with Firth-type penalisation to obtain the bias-corrected estimates, and
the second step is an ex post re-estimation of the intercept of the model using an
ordinary logistic regression with a constrained maximum likelihood. Between the first
and the second step, a prudential adjustment to potential relative risk reversals is
applied between two consecutive risk classes within the same financial theme.
Finally, a master scale to assign probabilities to rating classes is defined using a
smoothing cubic spline. This semi-parametric curve then allows the analysts to
logistic regression with intercept correction and prudential adjustment), which uses a
two-step estimation to ensure unbiased predicted probabilities while leaving
unaltered the bias-corrected effect estimates. The first step consists of a logistic
regression with Firth-type penalisation to obtain the bias-corrected estimates, and
the second step is an ex post re-estimation of the intercept of the model using an
ordinary logistic regression with a constrained maximum likelihood. Between the first
and the second step, a prudential adjustment to potential relative risk reversals is
applied between two consecutive risk classes within the same financial theme.
Finally, a master scale to assign probabilities to rating classes is defined using a
smoothing cubic spline. This semi-parametric curve then allows the analysts to
determine the PD thresholds required to assign firms to a “financial statistical rating”.
(ii) The second stage consists of a qualitative analysis. Qualitative profiles are
defined for each company by means of an expert assessment and allow the financial
statistical rating to be confirmed, upgraded or downgraded (see Section 6.4.1.3).
(iii) The last stage consists of a complementary qualitative analysis (based on

specific events or the automatically collected characteristics of the company). A list of
extra-financial contributions is set up for each company. Their impact is statistically
predetermined but grants a degree of flexibility to the expert, who may in some
cases modify the rating assigned in the previous steps to produce the global rating,
by either upgrading (in the case of group frameworks) or downgrading (if the analyst
considers the underlying risk posed by the extra-financial information to be
significantly higher).

The statistical models have been calibrated using a five-year rolling window of
financial statements and default data. The calibration of the aforementioned
statistical models is sector and approach-specific. The extra-financial contributions
have been calibrated using qualitative data collected for the same years.
Expert assessment
The expert can intervene at each step if certain information is not properly taken into
account. The rating proposed by the rating tool can be adjusted several notches
upward or downward. Intervention by the analyst is limited, however. The four-eyes
principle applies (and may be extended to six eyes or more according to the
complexity of the file or if the expert assessment leads to an upgrade of more than
two notches). Moreover, there is a rotation mechanism in place so that an analyst
does not rate the same company for more than four consecutive years, with a one-
year banning period. The mechanism applies to both the analyst and the
manager/individual approving the credit assessments.
The categories used for the qualitative profile are: the environment, the company in
itself, transparency, governance, financial flexibility, the company’s outlook and
strategy and finally corporate social responsibility. This information is gathered
through external documentation and interviews conducted by the analysts. Finally, a
list of possible extra-financial contributions is considered for each company, including
recent start of operations, payment incident on commercial papers, CEO profile,
group framework, significant events such as losses of more than half of the equity
capital, judicial proceedings and default. This information is collected from the
commercial court, the central credit register, the central register for payment
incidents on commercial papers and the BdF’s database of financial links between
French companies. The impact of each contribution is predetermined, however in
some cases
OCASIONAL the expert is allowed to modify this impact according to a predefined
N.º 2131
scope of acceptable variations.
There are local rating committees in each region. Moreover, when there are
recent start of operations, payment incident on commercial papers, CEO profile,
group framework, significant events such as losses of more than half of the equity
capital, judicial proceedings and default. This information is collected from the
commercial court, the central credit register, the central register for payment
incidents on commercial papers and the BdF’s database of financial links between
French companies. The impact of each contribution is predetermined, however in
some cases the expert is allowed to modify this impact according to a predefined
scope of acceptable variations.
There are local rating committees in each region. Moreover, when there are
significant discrepancies between the proposed BdF ICAS ratings and credit rating
agencies’ ratings, the Large Exposures Rating Committee examines groups’ ratings
to advise the General Director, who makes the final decision.
Model validation
The overall model performances, which include its discriminatory power, the
calibration quality of the rating system and the monotonicity of default rates, are
monitored using a large set of statistical tools. Concerning the discriminatory power,
two main statistics are monitored: the area under the receiving operating
characteristic (AUROC) curve and the accuracy ratio. For the calibration quality of
the rating
ECB system,
Occasional Paperthree tests
Series are/ implemented:
No 284 October 2021 the one-sided Clopper-Pearson 44
exact binomial test, the Hosmer-Lemeshow test, and the min-P multiple testing
procedure developed by Westfall and Wolfinger. Finally, for the monotonicity of rating
classes, only a Wald test for difference of proportions is used. The above-mentioned
tests are carried out both at the aggregate level (Eurosystem credit quality steps)
and on a disaggregated basis (by rating class, by sector and by approach).
The final BdF ICAS rating outcome is monitored once a year in two complementary
ways:
an internal annual back-test carried out by the Corporate Methodology

Division (the same division that develops and calibrates the model);
an independent ex post analysis communicated to the ECB that is carried

out by the Operations Risk and Compliance Directorate in conformity with
the ECAF performance monitoring mechanism.
A.4.2 Organisation
Each year, the BdF’s ICAS assesses NFCs with a turnover of €750,000 or more and
with available financial documentation. At the end of 2020, this corresponded to
237,971 companies, of which around 4,600 were consolidated groups.
Set-up
The Corporate Methodology Division of the Directorate General Services to the

Economy and Network Activities is in charge of defining the overall corporate rating
methodology, including the model development and calibration.
Rating decisions are taken by each branch of the BdF network, under the guidance
BANCO DE ESPAÑA
of the
45 DOCUMENTO general and regional directors who successively delegate their rating
OCASIONAL N.º 2131
responsibilities. Around 1,000 people are involved in the rating process.

Consolidated accounts are rated by specialised teams (one per region). All analysts
must adhere to professional rules described in detail in a code of conduct.
The Corporate Methodology Division of the Directorate General Services to the
Economy and Network Activities is in charge of defining the overall corporate rating
methodology, including the model development and calibration.
Rating decisions are taken by each branch of the BdF network, under the guidance
of the general and regional directors who successively delegate their rating
responsibilities. Around 1,000 people are involved in the rating process.
Consolidated accounts are rated by specialised teams (one per region). All analysts
must adhere to professional rules described in detail in a code of conduct.
Validation and performance monitoring are performed by the Operations Risk and
Compliance Directorate of the Directorate General Financial Stability and
Operations, thus respecting the principle of separation of functions.
A.5
A.5 Banca
Banca d’Italia
d’Italia (BdI)
(BdI)
A.5 Banca d’Italia (BdI)

A.5.1
ECB Statistical
Occasional model
Paper Series No 284 / October 2021 45
Overview
Overview
Overview
The BdI ICAS statistical model predicts an individual PD over a one-year horizon for
The BdI ICAS statistical model predicts an individual PD over a one-year horizon for
Italian
The BdINFCs
ICAShaving bothmodel
statistical an exposure
predictsto the banking PD system
overof at least €30,000
horizonas
Italian NFCs having both an exposure toan individual
the banking system a one-year
of at least €30,000 for
as
reported
Italian in the
NFCs National
having both Credit
an Registertoand
exposure the available
banking financialofstatement
system at least data. Due
€30,000 as
reported in the National Credit Register and available financial statement data. Due
to correlation
reported in theand data frequency
National Credit Registerreasons, andthe generalfinancial
available architecture of the data.
statement BdI ICAS
Due
to correlation and data frequency reasons, the general architecture of the BdI ICAS
statistical
to model
correlation andhas
datatwo independent
frequency components,
reasons, the generalproviding distinct
architecture of credit
the BdIscores
ICAS
statistical model has two independent components, providing distinct credit scores
and representing
statistical model has partial
twomeasures
independent of credit risk:
components, providing distinct credit scores
and representing partial measures of credit risk:
and representing partial measures of credit risk:
1. a credit behaviour component, namely a logit regression aimed at
1. a credit behaviour component, namely a logit regression aimed at
1. a modelling data coming
credit behaviour from thenamely
component, National Credit
a logit Register;aimed at
regression
modelling data coming from the National Credit Register;
modelling data coming from the National Credit Register;
2. a financial component, namely a logit regression based on yearly financial
2. a financial component, namely a logit regression based on yearly financial
2. statement
a financial data
statement data
(financial
component,
(financial
structure,
namely a logit
structure,
profitability
regression
profitability
data,
based
data,
etc.).
on yearly financial
etc.).
statement data (financial structure, profitability data, etc.).
The credit behaviour component is divided into three different sub-models depending
The credit behaviour component is divided into three different sub-models depending
on
The the sizebehaviour
credit of the firm’s financial exposure
component is divided towards
into three the bankingsub-models
different system. The financial
depending
on the size of the firm’s financial exposure towards the banking system. The financial
component
on the size consists
of the of six
firm’s different
financial sub-models
exposure towards according
the to their
banking industry
system. Thesector.
financial
component consists of six different sub-models according to their industry sector.
The two components
component consists are
of six then merged
different into the final
sub-models overalltomodel
according their through asector.
industry further
The two components are then merged into the final overall model through a further
logistic
The tworegression
components andareprovide the finalinto
then merged score.
the The
finalcorresponding PD is finally
overall model through a further
logistic regression and provide the final score. The corresponding PD is finally
submitted
logistic to the
regression so-called
and expert
provide thesystem
final module.
score. The corresponding PD is finally
submitted to the so-called expert system module.
submitted to the so-called expert system module.
In terms of ESG factors, governance quality is already assessed in the management
In terms of ESG factors, governance quality is already assessed in the management
and
In corporate
terms of ESG governance profile. In the
factors, governance same
quality fashion,assessed
is already environmental
in theand social
management
and corporate governance profile. In the same fashion, environmental and social
factors
and are
corporateconsidered
governance by the analysts
profile. In thewhen
same they are
fashion, deemed to have
environmental a significant
factors are considered by the analysts when they are deemed to have and social
a significant
effect
factors on
aredefault probability.
considered by the analysts when they are deemed to have a significant
effect on default probability.
effect on default probability.
At the same time, work is in progress to deal with ESG factors in a more systematic
At the same time, work is in progress to deal with ESG factors in a more systematic
way
At thebysame
identifying a set is
time, work of additional
progressESG indicators to be integrated in the
way by identifying a set ofinadditional to deal
ESG with ESG
indicators factors
to be in a more
integrated in the systematic
assessment
way process.
by identifying a set of additional ESG indicators to be integrated in the
assessment process.
assessment process.

The BdI ICAS is calibrated using a pooled cross-sectional approach, i.e. default data
and
The estimation
BdI ICAS isdata samples
calibrated refera to
using different
pooled (two-year) time
cross-sectional periods.i.e.
approach, In order todata
and estimation data samples refer to different (two-year) time periods. In default
order to
maximise
and the
estimation discriminatory power
data samplespower
refer tobetween sound
differentsound and
(two-year) distressed firms
time periods. Inagainst
order tothe
maximise the discriminatory between and distressed firms against the
so-called
maximise rare
the events bias, a power
discriminatory balanced sample
between is used,
sound and containing
distressed an equal
firms number
against the
BANCO DE ESPAÑA so-called rare events bias, a balanced sample is used, containing an equal number
of defaulted
so-called rare and non-defaulted
events bias, a firms (50%
balanced default
sample is rate).containing
used, Credit behaviour
an equaland
number
of defaulted and non-defaulted firms (50% default rate). Credit behaviour and
financial
of defaultedmodels are then calibrated
and non-defaulted firmsto the default
(50% default rates
rate). prevailing in each and
Credit behaviour sector and
financial models are then calibrated to the default rates prevailing in each sector and
credit-size
financial calibration
models datasets.
are then calibrated to the default rates prevailing in each sector and
credit-size calibration datasets.
and estimation data samples refer to different (two-year) time periods. In order to
maximise the discriminatory power between sound and distressed firms against the
so-called rare events bias, a balanced sample is used, containing an equal number
of defaulted and non-defaulted firms (50% default rate). Credit behaviour and
financial models are then calibrated to the default rates prevailing in each sector and
credit-size calibration datasets.
Besides “static”
Besides “static” data
“static” data on
data on debtors,
on debtors,
debtors, thethe model
the model inputs
model inputs include
inputs include credit
include credit behaviour
credit behaviour data
behaviour data
data
Besides
gathered from
gathered from the
from the National
the National Credit
National Credit Register
Credit Register
Register andand AnaCredit
and AnaCredit
AnaCredit as as well
as well as
well as financial
as financial
financial
gathered
statement
statement data.
data. For
For financial
financial statement
statement data,
data, the
the BdI
BdI ICAS
ICAS relies
relies on
on the
the BdI’s
BdI’s
statement data. For financial statement data, the BdI ICAS relies on the BdI’s
financial statements
financial statements archive,
statements archive, which
archive, which
which in in turn
in turn is
turn is based
is based
based onon data
on data collected
data collected from
collected from Centrale
from Centrale
Centrale
financial
dei
ECBBilanci
dei Bilanci (CEBI,
(CEBI,
Occasional belonging
Series No to
belonging
Paper to Cerved
Cerved
284 / OctoberGroup).
2021 Financial
Group). Financial statement
statement data
data are
are 46
dei Bilanci (CEBI, belonging to Cerved Group). Financial statement data are
reclassified according
reclassified according
according toto the
to the CEBI
the CEBI reclassification
CEBI reclassification accounting
reclassification accounting scheme,
accounting scheme, which
scheme, which can
which can be
can be
be
reclassified
applied
applied to
to both
both nGAAP
nGAAP and
and IFRS
IFRS financial
statements. As
As a
a consequence,
consequence,
applied to both nGAAP and IFRS financial statements. As a consequence,
comparability among
comparability among
among thethe financial
the financial statements
financial statements
statements of of different
of different companies
different companies
companies is is ensured.
is ensured.
ensured.
comparability
Expert
Expert assessment
Expert assessment
assessment
Starting
Starting from the automatically generated statistical PD, the analyst’s assessment
Starting from
from the
the automatically
automatically generated
generated statistical
statistical PD,
PD, the
the analyst’s
analyst’s assessment
assessment
follows
follows a template-guided process spanning eight different profiles. Partial scores
follows a template-guided process spanning eight different profiles. Partial scores
a template-guided process spanning eight different profiles. Partial scores
resulting from
resulting from each profile
profile are weighted
weighted and aggregated
aggregated in orderorder to produce
produce a final
final
resulting from each
each profile are
are weighted and
and aggregated in in order to
to produce a a final
grade.
grade. A decision matrix translating the final grade into the rating decision provides a
grade. AA decision
decision matrix
matrix translating
translating the
the final
final grade
grade into
into the
the rating
rating decision
decision provides
provides aa
non-binding guideline
non-binding guideline for analysts
analysts when making
making the final
final decision.
non-binding guideline for
for analysts when
when making the the final decision.
decision.
The
The analysis can either confirm the rating derived from the statistical stage or modify
The analysis
analysis can
can either
either confirm
confirm the
the rating
rating derived
derived from
from the
the statistical
statistical stage
stage or
or modify
modify
it
it by
by notching
notching the
the risk
risk class
class up
up or
or down.
down. The
The final
final rating
rating expresses
expresses an
an opinion
opinion on
on
it by notching the risk class up or down. The final rating expresses an opinion on
whether the
whether the data considered
considered improve, confirm
confirm or worsen
worsen the risk
risk assessment
whether the data
data considered improve,
improve, confirm or or worsen the
the risk assessment
assessment
produced
produced by the statistical module. Nonetheless, the final assessment is upper-
produced by the statistical module. Nonetheless, the final assessment is
by the statistical module. Nonetheless, the final assessment is upper-
upper-
bounded:
bounded: analysts
analysts can
can raise
raise the
the final
final rating
rating only
only by
by one
one notch.
notch.
bounded: analysts can raise the final rating only by one notch.
Profiles
Profiles include a review of static data, the evaluation of the automatic rating, an
Profiles include
include a a review
review ofof static
static data,
data, the
the evaluation
evaluation ofof the
the automatic
automatic rating,
rating, an
an
analysis
analysis of
of the
the balance
balance sheet
sheet ratios
ratios (including
(including at
at peer
peer group
group level)
level) and
and of
of financial
financial
analysis of the balance sheet ratios (including at peer group level) and of financial
flexibility,
flexibility, an insight on the quality of management and corporate governance, an
flexibility, an
an insight
insight on
on the
the quality
quality of
of management
management and and corporate
corporate governance,
governance, an an
analysis
analysis of the economic environment, an overview of the industrial sector and the
analysis of the economic environment, an overview of the industrial sector and the
of the economic environment, an overview of the industrial sector and the
geographic
geographic location, the group analysis, a review of third-party opinions and a check
geographic location,
location, the
the group
group analysis,
analysis, a a review
review of
of third-party
third-party opinions
opinions and
and a a check
check
of
of recent news on the firm.
of recent
recent news
news onon the
the firm.
firm.
For
For each firm, an independent assessment by at least two analysts is foreseen. If
For each
each firm,
firm, an
an independent
independent assessment
assessment by by at
at least
least two
two analysts
analysts is
is foreseen.
foreseen. If If
their
their views diverge or if specific conditions apply, the involvement of the Rating
their views
views diverge
diverge oror if
if specific
specific conditions
conditions apply,
apply, the
the involvement
involvement of of the
the Rating
Rating
Committee
Committee is required. The committee is composed of two members (head and
Committee is is required.
required. TheThe committee
committee is is composed
composed of of two
two members
members (head
(head andand
deputy
deputy of the Credit Risk Assessment Division), the President (head of the Risk
deputy ofof the
the Credit
Credit Risk
Risk Assessment
Assessment Division),
Division), the
the President
President (head
(head ofof the
the Risk
Risk
Management
Management Directorate or an alternate) and the Secretary (a senior professional).
Management Directorate
Directorate or or an
an alternate)
alternate) and
and the
the Secretary
Secretary (a(a senior
senior professional).
professional).
Analysts
Analysts involved in the assessment are also required to participate in the meetings.
Analysts involved in the assessment are also required to participate in
involved in the assessment are also required to participate in the
the meetings.
meetings.
The
The Rating
Rating Committee
Committee meets
meets at
at least
least once
once a
a month.
month. For
For selected
selected cases,
cases, written
written
The Rating Committee meets at least once a month. For selected cases, written
procedures
procedures are adopted. The committee can improve the rating by up to three
procedures are are adopted.
adopted. The The committee
committee cancan improve
improve the
the rating
rating by
by up
up to
to three
three
notches.
notches.
notches.
Model
Model validation
Model validation
validation
The
The aim of the validation process is to check the correctness and accuracy of the
The aim
aim of
of the
the validation
validation process
process isis to
to check
check the
the correctness
correctness and
and accuracy
accuracy of
of the
the
methods
methods and processes of the rating system and its time stability (monitoring). The
and processes of the rating system and its time stability (monitoring). The
validation
validation activity, using different statistical tools, calculates a series of indicators on
validation activity,
activity, using
using different
different statistical
statistical tools,
tools, calculates
calculates aa series
series of
of indicators
indicators on
on
the
the statistical
statistical model
model and
and on
on the
the expert
expert assessment.
assessment.
BANCO DE ESPAÑA
the OCASIONAL
47 DOCUMENTO statistical model and on the expert assessment.
N.º 2131
Model validation
The aim of the validation process is to check the correctness and accuracy of the
validation activity, using different statistical tools, calculates a series of indicators on
the statistical model and on the expert assessment.
Regarding the statistical model, the validation activity measures the discriminatory
Regarding the statistical model, the validation activity measures the discriminatory
power, namely the ability of the system to distinguish ex ante the defaulting from the
power, namely the ability of the system to distinguish ex ante the defaulting from the
non-defaulting companies, and the predictive power, i.e. the capacity to estimate
non-defaulting companies, and the predictive power, i.e. the capacity to estimate
PDs Occasional
ECB reflecting Paper
real defaults.
Series NoThe
284 /back-test verifies that the number of defaults
October 2021 47
PDs reflecting real defaults. The back-test verifies that the number of defaults
recorded is in line with the forecast made at the beginning of the year, according to
recorded is in line with the forecast made at the beginning of the year, according to
the ECAF methodology.
the ECAF methodology.
For the expert assessment validation, the main goal is to quantify the contribution
For the expert assessment validation, the main goal is to quantify the contribution
provided by the expert analysis. The role of the analysts in determining the final
provided by the expert analysis. The role of the analysts in determining the final
rating is explained by several statistical indicators related to: (i) the level of activity,
rating is explained by several statistical indicators related to: (i) the level of activity,
(ii) the way the various profiles of analysis are used, and (iii) the correlation among
(ii) the way the various profiles of analysis are used, and (iii) the correlation among
the scores assigned to the profiles. The analysis also measures statistical
the scores assigned to the profiles. The analysis also measures statistical
differences within and among the branches. Outliers and defaults recorded during
differences within and among the branches. Outliers and defaults recorded during
the year are the subject of special focus.
the year are the subject of special focus.
A.5.2
A.5.2 Organisation
Organisation
Scope
Scope of
of rated
rated entities
entities
The BdI ICAS generates on a yearly basis almost 4,000 ratings for NFCs to which
The BdI ICAS generates on a yearly basis almost 4,000 ratings for NFCs to which
banks have granted potentially eligible loans. In addition, “purely statistical” PDs are
banks have granted potentially eligible loans. In addition, “purely statistical” PDs are
available for around 350,000 non-financial firms.
available for around 350,000 non-financial firms.
Set-up
Set-up
The system is run by the Financial Risk Management Directorate, which is part of the
The system is run by the Financial Risk Management Directorate, which is part of the
Directorate General for Markets and Payment Systems. Operations and task
Directorate General for Markets and Payment Systems. Operations and task
coordination are carried out by the Credit Risk Assessment Division (CRA Division),
coordination are carried out by the Credit Risk Assessment Division (CRA Division),
where a dedicated team of analysts works at the expert assessment stage. In order
where a dedicated team of analysts works at the expert assessment stage. In order
to better exploit a deeper knowledge of the local economic context, additional
to better exploit a deeper knowledge of the local economic context, additional
analysts contribute to the expert assessment from the 15 local branches of the BdI
analysts contribute to the expert assessment from the 15 local branches of the BdI
involved in the ICAS project. Model development is currently carried out within the
involved in the ICAS project. Model development is currently carried out within the
CRA Division, while model validation is a responsibility of the Financial Risk Control
CRA Division, while model validation is a responsibility of the Financial Risk Control
Division, also belonging to the Financial Risk Management Directorate.
Division, also belonging to the Financial Risk Management Directorate.
A.6 Banco de Portugal (BdP)

Overview
Overview
Overview
The statistical model produces a point-in-time rating with a prediction horizon of one
year through individual PDs.
The
year statistical model produces
through individual PDs. a point-in-time rating with a prediction horizon of one
year
In thethrough
first step individual PDs. assessment), the statistical models for both individual
(quantitative
In the
48 DOCUMENTO first step (quantitative assessment), the statistical models for both individual
BANCO DE ESPAÑA
and consolidated accounts automatically compute a score and a classification/rating
OCASIONAL N.º 2131
In
andthe first stepPaper
consolidated (quantitative
accounts assessment),
automatically the statistical
compute a scoremodels
and afor both individual
classification/rating
2021 The model’s prime output is derived48
ECB Occasional Series No 284 / October 2021
proposal as anPaper
ECB Occasional average
SeriesPDNoand
284 a rating class.
/ October 48
proposal as an average PD and a rating class. The model’s prime output is derived
from statistically identified and selected purely quantitative characteristics. Logit
proposal
from as an average
statistically PDand
identified andselected
a ratingpurely
class. quantitative
The model’scharacteristics.
prime output isLogit
derived
models are used for both individual and consolidated accounts.
Overview
year through individual PDs.
In the first step (quantitative assessment), the statistical models for both individual
proposal as an average PD and a rating class. The model’s prime output is derived
from statistically identified and selected purely quantitative characteristics. Logit
models are used for both individual and consolidated accounts.
For individual accounts, ten models covering different economic sectors are used,
combining size (micro firms; all other firms) and industry (manufacturing,
transportation and storage; construction and real estate activities; wholesale and
retail trade and the primary sector; utilities and mining and quarrying; and services).
The process starts by considering a large pool of variables, including a small set of
macro factors, in order to capture the possible influence of the economy as a whole
on a specific firm. Financial ratios are winsorised at the 2nd and 98th percentiles to
avoid the inclusion of extreme values. Derived variables are also included in the pool
of explanatory variables, either through the calculation of relative ranks for each
financial ratio (by year-size-industry), normalised between 0 and 1, or through the
transformation into logarithms for the strictly positive variables. For each variable of
the initial pool of N variables, a model is estimated with the fixed effects plus that
variable. This is a multi-criteria system of variable selection with a large pool of
potential variables (based on the methodology of Imbens and Rubin, 2015), through
a maximum likelihood estimation. This approach selects the variables in an iterative
process based on the explanatory prediction power that each variable is able to
provide. The new variable must improve the model’s AUROC and Akaike information
criterion.
For consolidated accounts, only one model is used since the number of observations
in each sector is smaller. Considering the time span for the consolidated accounts
model, the macroeconomic variables were removed and the annual ranks were
replaced by multiannual ranks (calculated by industry for the complete period), to
account for the macroeconomic situation. The econometric model follows, in general,
the methodology described in Antunes et al. (2016) used for the individual
econometric models, with the necessary adaptations to the information available for
economic groups.
After selecting the explanatory variables, the experts from both the Sectoral Analysis
Unit and the Credit Assessment Unit evaluate the model and may propose changes
to the selected variables or include interactions with industry dummies.
Calibration approach
ECB Occasional Paper and
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October 2021 49
The statistical model calibration requires the annual conduct of the (two-sided)
Hosmer-Lemeshow test as an indicator of the quality of the assignment of PDs. It is
a joint test for several rating grades and assumes all obligors assigned to a rating
grade have the same PD, i.e. each class has a reference value for its PD. The
Hosmer-Lemeshow statistic is Chi-square distributed with K degrees of freedom
under the hypothesis that all the PD forecasts match the true PDs.
The database used for the calibration of the models combines information from the
Central Balance Sheet Office (annual data from 2006 to 2018) and the Central Credit
Register (information for the time span 2002-2019) databases, both managed by the
BdP. The database is divided into ten industry and size groups for individual
accounts and one dataset for consolidated accounts. Each group is calibrated
separately, which results in ten individual models and one consolidated model.
The database used for the calibration of the models combines information from the
Central Balance Sheet Office (annual data from 2006 to 2018) and the Central Credit
Register (information for the time span 2002-2019) databases, both managed by the
BdP. The database is divided into ten industry and size groups for individual
accounts and one dataset for consolidated accounts. Each group is calibrated
separately, which results in ten individual models and one consolidated model.
Expert assessment
In the second step, financial analysts check the entity’s creditworthiness and
determine the final rating. Expert analysis may either confirm the statistical rating
proposal or alternatively overrule it by notching the rating up or down on the master
scale. In this step, the experts use a set of guidelines to analyse additional data that
were not considered by the statistical model or data that represent exceptions to the
model’s behaviour.
The expert system analysis of the individual company is broken down into seven
stages, the first of which is automatically conducted for each company, on a daily
basis, according to the most recent information available and regardless of whether
a new credit assessment is manually triggered by an analyst. This first stage allows
the system to automatically identify whether a company’s rating should be revised to
a “non-eligible” class for monetary policy purposes or even to default.
The seven stages are: (1) an a priori analysis of credit eligibility, (2) an economic and
financial analysis of the company and sector, (3) an analysis of qualitative
information and model simulation, (4) an analysis of credit evolution, (5) an analysis
of other information, (6) an analysis of other entities’ ratings, and (7) an integrated
analysis of the group’s rating.
Consideration of ESG factors is currently limited and, if any information is available,

it is included in Stage 3, in the qualitative analysis of the expert system.
In principle, if an expert analysis is carried out one of three outcomes is expected

within each stage:
the analyst chooses to adjust the statistical model’s assigned rating

upward by one rating class (upgrade);
the analyst chooses to adjust the statistical model’s assigned rating
downward by one rating class (downgrade);
the analyst finds no reason to adjust the statistical model’s assigned rating.
Although the system provides each analyst with suggested changes to the model’s
rating results (according to the information deemed relevant in each stage of the
expert assessment), the analyst has to provide a comment either agreeing with the
system’s proposal based on the automatic flags or explaining their reasoning to
decide on a different outcome. This is valid for every stage of the expert assessment
process.
Each stage’s intended outcome (one notch – or class in the 20-class master scale
considered – up, down or rating unchanged) implies that the company’s rating class
can deviate from the statistical model’s result by at most four notches. However, in
exceptional cases (Stage 3), the analyst may choose to upgrade or downgrade a
company’s rating by more than one notch. In such cases, the analyst must provide
clear justification, and the change must be approved by a second analyst and the
Rating Committee. Approval by the Rating Committee is also required whenever the
final rating decision differs between the first and second analyst or notch changes
deviate significantly from the quantitative assessment.
Following the four-eyes principle, every assessment has to be examined by two

considered – up, down or rating unchanged) implies that the company’s rating class
can deviate from the statistical model’s result by at most four notches. However, in
exceptional cases (Stage 3), the analyst may choose to upgrade or downgrade a
company’s rating by more than one notch. In such cases, the analyst must provide
clear justification, and the change must be approved by a second analyst and the
Rating Committee. Approval by the Rating Committee is also required whenever the
final rating decision differs between the first and second analyst or notch changes
deviate significantly from the quantitative assessment.
Following the four-eyes principle, every assessment has to be examined by two

analysts, i.e. once the analyst has assigned the final rating, each credit assessment
decision is checked by a second analyst (approver).
The members of the Rating Committee are the head of the division, the head of the
unit, the head of a different unit and the two analysts involved in the related credit
assessment decision. The members of the Rating Committee must discuss and
decide on the final rating. All these steps are fully documented and are available at
any moment for auditing purposes.
The rating must be evaluated by the Rating Committee if one of the following
conditions is met:
the sum of rating changes from Stages 2 to 5 is more than four notches;
the rating change in Stage 3 is more than two notches;
an analyst disagrees with the automatic rating proposal in Stages 6 and 7;
the second analyst disagrees with the changes proposed in the initial
analysis.
Model validation
The Risk Management Department conducts the annual validation tests, which
include the following:
quantitative validation process: (i) discriminatory power (AUROC and

ECB Occasional Paper ratio),
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calibration 51
Spiegelhalter test and two-sided binomial test);
qualitative validation process, which consists of an unbiasedness analysis

(transition matrix, distribution of changes between statistical and final
rating, and distribution of adjustments made in the expert analysis for each
category).
Each analyst and approver can assess the same company for a maximum period of
four years, after which they are subject to a banning period of at least one year.
A.6.2 Organisation
At full capability, the BdP ICAS can assess around 300 companies with consolidated
accounts and around 4,000 companies with individual accounts. However, it is
important to emphasise that although these estimates have been defined, the main
goal will always be as a minimum the to fulfil the needs of those counterparties that
select the BdP ICAS as a credit assessment system.
At full capability, the BdP ICAS can assess around 300 companies with consolidated
accounts and around 4,000 companies with individual accounts. However, it is
important to emphasise that although these estimates have been defined, the main
goal will always be as a minimum the to fulfil the needs of those counterparties that
select the BdP ICAS as a credit assessment system.
Set-up
Model development and calibration are performed by the Sectoral Analysis Unit
(Statistics Department) in collaboration with the Economics and Research
Department. Credit assessment is carried out by the Credit Assessment Unit
(Statistics Department), and validation is performed by the Risk Management
Department.
A.7 Banka Slovenije (BS)
Overview
The output of the BS ICAS is a one-year point-in-time PD on an individual basis. The

rating scale consists of 13 grades for non-defaulters and one grade for defaulters.
There is no differentiation between different types of default.
For the statistical model, a logistic regression is used, based on a time series of six
years. The main data sources are the business register, financial statements, the
credit register and the transaction accounts register. Defaults are identified on the
basis of credit register data and insolvency proceedings reported by the Supreme
Court. Two different models are developed for large enterprises and the SME
segment, respectively.
In the first phase, the micro model (a model based on individual companies’ data) is
estimated. A modified Imbens-Rubin method is used in the selection procedure for
financial indicators. It is an iterative method that in each step adds the independent
variable to optimise the test statistics of the model. In doing so, the final set of
independent variables is selected for each segment (large enterprises or SMEs).
Based on quarterly default rate data, macroeconomic forecasts for the following year
are obtained and included in the next phase of the model assessment. To this end,
sectors are categorised into four groups. Due to the COVID-19 pandemic, the
method of incorporating macroeconomic forecasts was changed in 2020 and is now
based on expert judgement.
ESG indicators have not been systematically addressed yet. Social and governance
indicators are partially covered in the expert system within the governance category,
while environmental indicators are not considered. The area of ESG indicators has
been examined, and a new comprehensive framework may be introduced in the near
future.
BANCO DE ESPAÑA 52 Calibration approach and data

Each year, the model is recalibrated using the latest data (time series of six years).
The process of selecting independent variables is repeated if they are no longer
been examined, and a new comprehensive framework may be introduced in the near
future.
Each year, the model is recalibrated using the latest data (time series of six years).
The process of selecting independent variables is repeated if they are no longer
statistically significant. Both models (for large enterprises and SMEs) are assessed
based on the new data. In addition, macroeconomic forecasts for the following years
are applied.
Expert assessment
For the expert assessment, a simple scoring system is implemented. Four main
categories are considered:
ECB 1. marketPaper
Occasional position
Seriesand
No business model
284 / October 2021(competition and the company’s 53
position in the sector, customers and suppliers, strategy and business
model);
2. governance (organisational structure, human resources, processes,

technology, leadership);
3. group of connected clients (consolidated financial statements, owners,

subsidiaries and affiliates);
4. financial standing and performance of the company.
As a result of the expert analysis, the statistical rating can be upgraded by at most
two rating grades and downgraded by an unlimited number of grades.
For each rating, the four-eyes principle must be ensured, i.e. each rating must be
validated. If the analyst and the validator do not agree on the rating, the Rating
Committee confirms the final rating.
Model validation
The Risk Management Department of BS performs the annual model validation. The
following tests are conducted for the statistical model: the AUROC, accuracy ratio,
Hosmer-Lemeshow test, Spiegelhalter test and binomial test. The transition matrix
and distribution of changes for ratings are reviewed to validate the qualitative
assessment.
A.7.2 Organisation
Approximately 30,000 entities are rated each year using the statistical model (valid
ICAS population with exposure to at least one Slovenian bank). Approximately
500 entities have a full rating (expert judgement included).
Set-up
The Banking Supervision Department is responsible for the development,

recalibration and maintenance of the model. The qualitative assessment is also
performed by the Banking Supervision Department. The model validation is
ICAS population with exposure to at least one Slovenian bank). Approximately
500 entities have a full rating (expert judgement included).
Set-up
The Banking Supervision Department is responsible for the development,

recalibration and maintenance of the model. The qualitative assessment is also
performed by the Banking Supervision Department. The model validation is
conducted by the Risk Management Department. Other departments that are also
involved include Banking Operations, Financial Statistics, IT and Systemic
Supervision, and Regulation.

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Acknowledgements
We would like to thank the members of the ICAS Expert Group, the Eurosystem Risk Management Committee and its Credit
Assessment and Eligibility Network, as well as Elke Heinle, Vesela Ivanova, Julia Körding, Anamaria Piloiu, Janina Engel, Federica
Orsini and Stefania Ciummo for their helpful comments. Andrea Bonizzoni provided very good research assistance. The views
expressed in this paper are those of the authors and do not necessarily reflect those of the ECB, the Deutsche Bundesbank, the
Banque de France, the Banco de España, the Banca d’Italia or the Oesterreichische Nationalbank.
Laura Auria
Deutsche Bundesbank, Frankfurt am Main, Germany; email: laura.auria@bundesbank.de
Markus Bingmer
Deutsche Bundesbank, Frankfurt am Main, Germany; email: markus.bingmer@bundesbank.de
Carlos Mateo Caicedo Graciano

Banque de France, Paris, France; email: mateo.caicedo@banque-france.fr
Clémence Charavel
Banque de France, Paris, France; email: clemence.charavel@banque-france.fr
Sergio Gavilá
Banco de España, Madrid, Spain; email: sergio.gavila@bde.es
Alessandra Iannamorelli
Banca d’Italia, Rome, Italy; email: alessandra.Iannamorelli@bancaditalia.it
Aviram Levy
Banca d’Italia, Rome, Italy; email: aviram.Levy@bancaditalia.it
Alfredo Maldonado
Banco de España, Madrid, Spain; email: alfredo.maldonado@bde.es
Florian Resch
Oesterreichische Nationalbank, Vienna, Austria; email: florian.resch@oenb.at
Anna Maria Rossi

Banca d’Italia, Rome, Italy; email: annamaria.rossi@bancaditalia.it
Stephan Sauer
European Central Bank, Frankfurt am Main, Germany; email: stephan.sauer@ecb.europa.eu
© European Central Bank, 2021

Postal address 60640 Frankfurt am Main, Germany
Telephone +49 69 1344 0
Website www.ecb.europa.eu
All rights reserved. Any reproduction, publication and reprint in the form of a different publication, whether printed or produced
electronically, in whole or in part, is permitted only with the explicit written authorisation of the ECB or the authors.
This paper can be downloaded without charge from the ECB website, from the Social Science Research Network electronic library or
from RePEc: Research Papers in Economics. Information on all of the papers published in the ECB Occasional Paper Series can be
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Overview of central banks’

in-house credit assessment 2021

Laura Auria, Markus Bingmer, Carlos Mateo

Carlos Mateo Caicedo Graciano

Anna Maria Rossi

Documentos Ocasionales. N.º 2131

© BANCO DE ESPAÑA, Madrid, 2021

ISSN: 1696-2230 (on-line edition)

JEL classification: E58.

Códigos JEL: E58.

2 ICASs in the context of the Eurosystem’s monetary policy operations 13

3 The Eurosystem’s guidelines for ICASs 25

3.1 Overview of the system 25

4 National ICASs – features and cross-comparison 31

Box 2 ESG factors and ICAS ratings 33

Annex – Features of national ICASs 35

The ICASs of Eurosystem NCBs are one of three sources of assessments of

Since all Eurosystem lending has to be based on adequate collateral, ICASs

The contribution of ICASs to monetary policy implementation becomes even more

ECB Occasional Paper Series No 284 / October 2021 5

BANCO DE ESPAÑA 9 DOCUMENTO OCASIONAL N.º 2131

policy implementation. It consists of a set of rules and requirements – eligibility

But ICASs provide an even more important contribution to the transmission

ECB Occasional Paper Series No 284 / October 2021 8

BANCO DE ESPAÑA 12 DOCUMENTO OCASIONAL N.º 2131

alsoSee, for example, Chapter 9 in helps

Central government securities Non-marketable*

2. a qualitative component, which examines the credit assessment processes and

ICASs and IRBs Up to 0.10% PD Up to 0.40% PD

Standard & Poor’s

2. a qualitative component, which examines

2.3.1 Use of ICASs before the introduction of the EMU in 1999

2.3.2 During the financial and

ECB Occasional Paper Series No 284 / October 2021 16

As of March 2020, the ECB decidedMore NCBs may steps

2.3.4 Use of ICASs beyond Eurosystem monetary policy operations

ECB Occasional Paper Series No 284 / October 2021 18

ECB Occasional Paper Series No 284 / October 2021 18

BANCO DE ESPAÑA 22 DOCUMENTO OCASIONAL N.º 2131

ECB Occasional Paper Series No 284 / October 2021 21

BANCO DE ESPAÑA 24 DOCUMENTO OCASIONAL N.º 2131

3.4 Key risk factors

The risk assessment methodology is generally applied to all enterprises in a uniform

3.5 Data sources

3.6 Default definition

3.7 IT system architecture

Overall, to support a reliable process and a good combination of quantitative and

3.8 Monitoring and internal validation

The validation encompasses both quantitative and qualitative elements. From a

Regarding the qualitative validation, aspects such as the consistency of methods

3.9 ECAF validation and monitoring

On an ongoing basis, ICASs are requested to have systematic approaches in place

Moreover, in order to ensure transparency and to enable continued monitoring, ICAS

BANCO DE ESPAÑA 30 DOCUMENTO OCASIONAL N.º 2131

From an organisational perspective, the cross-ICAS comparison shows some

Prediction 1 year 1 year 1 year 1 year 1 year 1 year 1 year

Point-in-time/ PIT PIT PIT/TTC PIT/TTC PIT/TTC PIT PIT/TTC

Quantitative Consensus Consensus Fractional Segmentation Logit model Logit Logistic

Number of 7,000 26,000 500 270,000 4,000 250 500

Number of - - ~950,000 - 350,000 38,000 30,000

Development of Statistics Directorate Rating Corporate Risk Statistics Banking

Rating of Statistics Regional Rating Branches Branches Statistics Banking

BANCO DE ESPAÑA 32 DOCUMENTO OCASIONAL N.º 2131

an internal annual back-test carried out by the Corporate Methodology

an independent ex post analysis communicated to the ECB that is carried

the analyst chooses to adjust the statistical model’s assigned rating

the rating change in Stage 3 is more than two notches;

an analyst disagrees with the automatic rating proposal in Stages 6 and 7;

quantitative validation process: (i) discriminatory power (AUROC and

qualitative validation process, which consists of an unbiasedness analysis