Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p38
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
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Character Range: 103452–106391

determining these estimates, an ADI may utilise internal data and relevant data from external sources (including pooled data).
 2.          Estimates must be grounded in historical experience and empirical evidence, and not based purely on subjective considerations. Changes in an ADI's lending and collection practices over the observation period must be taken into account. Estimates must be forward looking and responsive to changes in credit quality ahead of loss experience rather than lag such experience. The ADI's estimates must reflect the implications of technical advances, new data and other information as it becomes available. Where industry estimation practices evolve and improve over time, the ADI should consider these developments in assessing its own practices.
 3.          In order to avoid over-optimism in PD, LGD and EAD estimates, an ADI must add a margin of conservatism to its estimates that reflects the likely range of errors. Where methods and data are less satisfactory and the likely range of errors is larger, the margin of conservatism must be larger.

Definition of default
 1.          An ADI must record actual defaults using the reference definition of default detailed in APS 220.[12] The ADI must also use the reference definition of default for the estimation of PD and, where relevant, LGD and EAD (though this does not preclude the possibility of materiality considerations entering into the estimation process). In arriving at its estimates, the ADI may use external data that are not consistent with the reference definition of default provided it makes appropriate adjustments to the data to achieve broad equivalence with the reference definition. This same requirement also applies to any internal data collected prior to 1 January 2008. Internal data (including that pooled by a number of ADIs) collected subsequent to 1 January 2008 must be consistent with the reference definition of default.

Re-aging
 1.          An ADI must have clearly documented policies in respect of the counting of days past due and, in particular, in respect of the re-aging of facilities and the granting of extensions, deferrals, renewals and rewrites to existing accounts. Where the ADI treats a re-aged exposure in a similar fashion to other exposures that are considered to be in default, that exposure must be recorded as defaulted for Regulatory Capital purposes.

Risk quantification requirements specific to probability of default estimation

Requirements for all exposures
 1.          An ADI must estimate PD for each internal borrower grade for corporate, sovereign and financial institution exposures and for each pool of retail exposures.[13]
 2.          PD estimates must be calibrated to a long-run average of one-year default rates (one-year PD) for borrowers in each borrower grade and for exposures in each pool.
 3.          An ADI must estimate PD for each borrower grade or pool based on