UBI Banca Group

submitted quarterly to the Boards of Directors of the individual network banks. For the network
banks and Centrobanca the reports describe distributions by internal rating classes, LGD and
expected loss and for the network banks they also give changes in average risk for the corporate
market, the small business portfolio in the retail market and for the affluent and mass market
portfolios again in the retail market. Reporting for the product companies is based on the specific risk
for the various types of lending and products marketed. Special reports on specific matters are also
prepared on the main components of credit risk.
The set of models which constitute the internal rating system (IRB) of the Group are managed by the
Risk Management Area and by the Credit Area.
The system at present involves the use of automatic models for private individuals and small-sized
businesses, automatic models supplemented by qualitative questionnaires and a geo-sectoral module
for medium to large-size businesses. However, a mainly judgemental model for major borrowers (i.e.
groups of companies with authorised credit of greater than €20 million) was discontinued from July
2011.
Automatic models summarise ratings statistically on the basis of the following risk factors
appropriately calibrated according to the type of counterparty or model:
- economic and financial factors;
- performance factors (internal and external);
- qualitative factors (competitive positioning, corporate structure, etc.);
- geo-sectoral factors.
As part of the Basel 2 project activities, which involve an initial validation on the network banks and
Centrobanca limited to the “businesses” supervisory portfolio, estimates were performed on a new
generation of rating and LGD estimation models for that portfolio, following, amongst other things,
discussions with the Supervisory Authority.
The main features of this new generation of rating models are as follows:
the revision of the credit risk segmentation, which defines which model is applied to each
counterparty;
the development of a new quantitative component, which uses internal models for the analysis
of the financial component, abandoning the use of a model furnished by an external provider;
the development of new software engines to integrate the different components of quantitative
analysis;
the development of new qualitative questionnaires;
a different procedure for incorporating information on the group of companies to which a
counterparty belongs within automatic rating models;
a different procedure for updating ratings designed to ensure an optimum mix between the
need to incorporate up-to-date information and maintain a low level of volatility.
Estimates were performed with regard to LGD on the new models for the network banks, based,
amongst other things, on econometric estimate factors and used both from a management and
regulatory viewpoint. Centrobanca’s estimate models were also subjected to detailed revision, which
involved not only an update of the historical data series employed, but also a revision of the clusters
and underlying assumptions, with a conservative orientation.
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