Each methodology employed for modelling must be based upon a conscious, rigorous and documented choice made under the model governance framework, and guided by the model objective. Methodology options can be suggested by third parties, however, the choice of a specific methodology remains a decision made within each institution. The ownership of a methodology must be assigned to a specific team or function within the institution, with sufficient level of seniority. The choice of methodology must be clearly stated and justified in the model development documentation.
6.6.2
The choice of methodology must be made upon comparing several options derived from common industry practice and/or relevant academic literature. Institutions must explicitly list and document the benefits and limitations of each methodology.
6.6.3
The choice of methodology must follow the following principles, which must be included in the model documentation:
(i)
Consistency: Methodologies must be consistent and comparable across the institution, across risk metrics and risk types. For instance, two similar portfolios should be subject to similar modelling approaches, unless properly justified.
(ii)
Transparency: Methodologies must be clear and well-articulated to all stakeholders, including management, internal audit and the CBUAE. Mathematical formulation must be documented with all parameters clearly mentioned.
(iii)
Manageability: A methodology must be chosen only if all the steps of the model life-cycle can support it. Complex methodologies must be avoided if any step of the model life-cycle cannot be performed. The choice of methodology must be based upon its ability to be implemented and successfully maintained.
6.6.4
When choosing the most suitable methodology, institutions must avoid excessive and unreasonable generalisations to compensate for a lack of data.