Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p32
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 86919–89984

for specialised lending exposures subject to the supervisory slotting approach
 1.          An ADI using the supervisory slotting approach must assign specialised lending exposures to its internal rating grades based on its own criteria, systems and processes. The ADI must also have a documented process that maps those internal rating grades into the slotting categories of strong, good, satisfactory, weak and default in a conservative and consistent manner. The ADI must ensure that its mapping process results in an alignment of grades that is consistent with the criteria defining the slotting categories as detailed in Attachment G to this Prudential Standard. The ADI must ensure that overrides of its internal criteria do not render the mapping process ineffective.

Rating assignment horizon
 1.          Although the time horizon required for PD estimation is one year,[10] an ADI must use a longer time horizon when assigning borrowers to borrower grades or exposures to pools.
 2.          A borrower grade or pool must represent an ADI's assessment of the borrower's ability and willingness to perform contractually despite adverse economic conditions or the occurrence of unexpected events. The range of economic conditions that are considered when making assessments must be consistent with current conditions and those that are likely to occur over a business cycle within the respective industry or geographic region. Rating systems should be designed in such a way that idiosyncratic or industry-specific changes are a driver of migrations from one category to another, and business cycle effects may also be a driver.
 3.          An ADI's PD estimates for hedge funds, other highly leveraged financial institutions or borrowers whose assets are predominantly traded assets must reflect the performance of the underlying assets based on periods of stressed volatilities. For this purpose, a highly leveraged financial institution means a financial institution that exhibits the following characteristics:
        1.           use of investment strategies that are intended to generate returns with low correlation to equity and bond indices, or that involve complex investment structures;
        2.           use of high leverage to increase returns;
        3.           use of derivatives for speculative purposes;
        4.           use of short selling; or
        5.           a material element of its fees is performance related.
 4.          Given the difficulties in forecasting future events and the influence that they could have on a particular borrower's financial condition, an ADI must take a conservative view of projected information. Where limited data are available, the ADI must adopt a conservative bias in its analysis.

Use of statistical models in the rating process
 1.          The requirements in paragraphs 30 to 35 of this Attachment apply to statistical models and other mechanical methods used to assign borrower or facility grades or pools, and in the estimation of PD, LGD and EAD.
 2.          Credit scoring