Internal rating stress testing methods and implications

The internal validation function of Cariparma-Crédit Agricole has developed a stress testing framework on Individuals, Solo Traders and Sme ratings, with the aim of testing the performance of internal ratings in the current economic downturn. After having verified – through a backtesting analysis – the forecasting performance of the models, we have investigated their possible uses both for regulatory (authorization request to Bank of Italy for the validation of internal rating system, development of a new calibration testing tool to utilize during downturn phases) and management purposes (creation of capital buffers and assessment of economic capital in different Pillar 2 scenarios)