Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p43
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 116753–119763

of those responsible for the development of an ADI's rating systems and risk estimates.
 3.      An ADI must regularly compare realised default rates with PD estimates for each borrower grade or pool and ensure that the realised default rates are within the expected range for each grade or pool. An ADI using its own LGD and EAD estimates must also complete such analysis for those estimates. Comparisons must make use of historical data over as long a time period as possible. The methods and data used in these comparisons must be clearly documented. This analysis and documentation must be updated at least annually.
 4.      An ADI must also use other quantitative validation tools and comparisons with relevant external data sources. The analysis must be based on data that are appropriate to the portfolio, updated regularly and cover a relevant observation period. The ADI's internal assessment of the performance of its rating systems must be based on long data histories covering a range of economic conditions and, ideally, one or more complete business cycles.
 5.      An ADI must ensure that quantitative testing methods and other validation methods do not vary systematically with the economic cycle. Changes in methods and data (both data sources and periods covered) must be clearly and thoroughly documented.
 6.      An ADI must have documented internal standards for situations where deviations from expectations in realised PD rates and, where applicable, LGD and EAD rates, become significant enough to call the validity of the estimates into question. These standards must take account of business cycles and similar systematic variability in default experience. Where realised values continue to be higher than expected values, the ADI must revise its estimates upward to reflect its actual default and loss experience.
 7.      An ADI that uses supervisory, rather than internal, estimates of LGD and EAD must compare realised LGD and EAD rates to those set by APRA and use this information in its internal assessment of capital adequacy. The ADI must also complete such analysis in relation to EAD for arrangements that are excluded from the definition of a commitment under paragraph 3 of Attachment C to APS 112.

Attachment E - Requirements for recognition of collateral and credit risk mitigation

Eligible collateral under the FIRB approach
 1.              Where an ADI uses the FIRB approach, only the following may be recognised as eligible collateral:
        1.           financial collateral;
        2.           financial receivables;
        3.           commercial real estate and residential real estate; and
        4.           other physical collateral.

Eligible financial collateral
 1.              Eligible financial collateral is collateral that meets the minimum requirements detailed in Attachment G to APS 112.

Eligible financial receivables
 1.              Eligible financial receivables are exposures with an original maturity of one year or less, where