This excerpt taken from the IRE 20-F filed May 29, 2009.
Credit Risk Assessment & Measurement
All credit transactions are assessed at origination for credit quality and the borrower is assigned a credit grade based on a predefined credit rating scale. The risk, and consequently credit grade, is reassessed periodically as part of the transaction review process. The use of internal credit rating models and scoring tools, which measure the degree of risk inherent in lending to specific counterparties, is central to the credit risk assessment, and ongoing management processes within the Group. The primary model measures used are:
These measures are fully embedded in, and form an essential component of, the Groups daily and strategic credit risk management and credit pricing.
For the Groups retail consumer and smaller business portfolios, which are characterised by a large volume of customers with smaller individual exposures, the credit risk assessment is grounded on application and behavioural scoring tools. For larger commercial and corporate customers, the risk assessment is underpinned by statistical risk rating models which incorporate quantitative information from the customer (e.g. financial accounts) together with a qualitative assessment of non-financial risk factors such as management quality and market/trading outlook.
Other financial assets are assigned an internal rating supported by external ratings of the major rating agencies.
The credit risk rating systems employed within the Group use statistical analysis combined, where appropriate, with external data and the judgement of professional lenders.
An independent unit annually validates internal credit risk models from a performance and compliance perspective. This unit reports to the Risk Measurement Committee (RMC).
BANK OF IRELAND GROUP
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT (Continued)
55 RISK MANAGEMENT (continued)
Risk modelling is also applied at a portfolio level in the Groups credit businesses to guide economic capital allocation and strategic portfolio management.
The measures to calculate credit risk referred to above are used to calculate expected loss. A different basis is, however, used to derive the amount of incurred credit losses for financial reporting purposes. For financial reporting purposes, impairment allowances are recognised only with respect to losses that have been incurred at the balance sheet date based on objective evidence of impairment. This alternative basis of measurement means that the amount of incurred credit losses shown in the financial statements differs from expected loss.