Question 1: What is meant by “international standards” in connection with the definition of default?
The most widely accepted international standards for assessing the capital adequacy of banks, i.e. the Basel framework, incorporate specific definitions of default for wholesale and retail credit. ECAI definitions of default should broadly reflect those definitions, although they need not precisely duplicate the Basel definitions.

Question 2: Can definitions of default be adjusted to take into account local practices or institutional or market conditions?
Yes, as the Guidance notes, certain adjustments for local conditions may be appropriate, particularly to account for default conditions that should be interpreted as demonstrating that a borrower is “unlikely to pay.” As the BCBS has noted in guidance to banks, some flexibility in the definition of default is appropriate to reflect the particular circumstances of each jurisdiction.

Question 3: Must the quantitative back testing of ratings outcomes incorporate an analysis of recovery rates in all cases?
No, the quantitative analysis conducted should be tailored as appropriate to demonstrate the performance of the actual rating methodology applied by the ECAI. Specifics of the analysis may differ depending on the methodology; for example, if the rating methodology solely reflects default probabilities rather than loss rates, then recovery studies may not be relevant.

Question 4: Can unsolicited ratings be used for bank capital calculations?
No, the Central Bank of the UAE has determined that unsolicited ratings do not provide an appropriate basis for capital calculations by banks in the UAE.

Question 5: Does the recognition of certain rating agencies by the Central Bank imply an endorsement of those ECAIs?
No, recognition reflects only a determination that an ECAI and its ratings meet the requirements to be used for regulatory capital calculations as articulated in Central Bank standards and regulations.

Question 6: Does the requirement that rating methodologies be established for at least one year preclude new rating methodologies from being introduced?
No, this requirement does not preclude the development and implementation of new rating methods by an ECAI. However, use of ratings for capital adequacy calculations (as opposed to other uses of ratings) requires a demonstration of the reliability of the ratings. Demonstration of reliability takes time; one year of experience is the minimum requirement, and longer periods of observation, perhaps operating in parallel with previous rating methodologies, are preferable.

Question 7: Do ratings correspond to specific risk weights for capital, and if so where is that correspondence found?
Yes, the purpose of recognition of ECAIs and the alignment of their ratings as specified in the Guidance is to facilitate the use of these ratings for risk-weight assignments in regulatory capital adequacy calculations. Please consult the relevant Standards (such as the Standards on Credit Risk) for risk weights corresponding to each rating category.