Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p28
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 75910–78984

eligible provisions under paragraph 3 of this Attachment.

Treatment of expected loss and provisions
 1.              An ADI must separately compare the total EL amount for defaulted exposures and non-defaulted exposures with total eligible provisions associated with the relevant exposures.
 2.              Where the total EL amount is higher than total eligible provisions for the relevant exposures, the difference must be deducted from Common Equity Tier 1 Capital as detailed in APS 111.
 3.              For non-defaulted exposures, where the total EL amount is lower than eligible provisions associated with these exposures, the difference may be included in Tier 2 Capital up to a maximum of 0.6 per cent of credit RWA calculated under the IRB approach as detailed in APS 111.

Attachment D - Minimum requirements for the use of an IRB approach
 1.              The minimum requirements set out in this Attachment apply to all IRB exposures and the FIRB, AIRB, retail IRB and supervisory slotting approaches, unless stated otherwise. An ADI must ensure that the minimum requirements are met at the time of IRB approval by APRA and on an ongoing basis.

Composition of minimum requirements
 1.              An ADI's credit risk rating and associated risk estimation systems and processes must provide for a meaningful assessment of borrower and transaction characteristics, a meaningful differentiation and ranking of risk, and quantitative estimates of risk that are consistent, verifiable, relevant and soundly based. The internal ratings and quantitative risk estimates associated with those systems and processes must play an essential role in the ADI's risk management and decision-making processes.
 2.              An ADI must adhere to the overall requirements for rating system design, operation, controls, governance and use as well as the requirements for the quantification and validation of PD estimates. An ADI that uses its own estimates of LGD and EAD must also meet the incremental minimum requirements relating to those risk components.

Rating system design
 1.              Within each relevant IRB asset class, an ADI may utilise multiple rating methodologies or systems. If the ADI chooses to use multiple methodologies or systems, the rationale for assigning a borrower to a rating methodology or system must be documented and applied in a manner that best reflects the level of risk of the borrower. The ADI must not allocate borrowers across rating methodologies or systems for the primary purpose of minimising its capital requirement.

Rating dimensions

Requirements for corporate, sovereign and financial institution exposures
 1.              An internal rating system for corporate, sovereign and financial institution exposures must have two separate and distinct dimensions:
        1.           the risk of borrower default (borrower grade); and
        2.           transaction-specific factors (facility grade).
 2.              The borrower grade must be oriented to the risk of borrower default; that is, it must solely reflect