Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p6
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 14097–17168

Prudential Standard. Where the ADI uses the:
        1.           FIRB approach, it must provide its own estimates of PD and M, and rely on supervisory estimates for LGD and EAD;
        2.           AIRB approach, it must provide its own estimates of PD, LGD (excluding senior unsecured and subordinated corporate exposures for which the ADI must use supervisory LGD estimates) and M, and rely on supervisory estimates for EAD;
        3.           retail IRB approach, it must provide its own estimates of PD, LGD and EAD (excluding non-revolving retail exposures for which the ADI must use supervisory EAD estimates); and
        4.           supervisory slotting approach, it must provide its own mapping of credit exposures to the supervisory slotting categories, and rely on supervisory risk weights for the slotting categories and supervisory estimates for EAD.
    Under all approaches, the ADI must use the relevant IRB risk-weight function or schedule, as detailed in Attachment A to this Prudential Standard, to derive RWA for UL and the approach detailed in Attachment C to this Prudential Standard to derive EL.
 1.          An ADI must apply the:
        1.           FIRB approach to all sovereign, financial institution and large corporate exposures, except IPRE exposures that meet the definition of a large corporate exposure where the ADI may apply a FIRB or supervisory slotting approach in accordance with its IRB approval;
        2.           retail IRB approach to all retail exposures; and
        3.           supervisory slotting approach to all project finance, object finance and commodities finance exposures.
 2.          An ADI may reduce its Regulatory Capital requirement through the use of CRM where it meets the requirements detailed in Attachments B, E and F to this Prudential Standard, and APS 112 where applicable.

Governance and oversight
 1.          All material aspects of an ADI's rating and estimation processes must be approved by the ADI's Board, or relevant Board committee, and senior management. Those parties must possess a general understanding of the ADI's rating systems and a detailed understanding of the associated management reports. Senior management must notify the Board, or Board committee, of material changes or exceptions from established policies that could have a material impact on the ADI's rating systems.
 2.          Senior management must understand the design and operation of an ADI's rating systems and approve any material differences identified between established procedures and actual practice. Senior management must ensure that the rating systems are operating as intended on an ongoing basis. Senior management and staff in the credit risk control function must meet regularly to discuss the performance of the rating process, areas requiring improvement and the status of efforts to improve previously identified deficiencies.
 3.          Internal ratings must be an essential part of the reporting to the Board and senior management. Reporting must include:
        1.           risk