Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p42
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 114095–116999

a one-year fixed-horizon approach; that is, for each observation in the reference dataset, default outcomes must be linked to relevant borrower and facility characteristics one year prior to default.
 8.          An ADI's EAD estimates must be based on reference data that reflect the borrower, facility and ADI management practice characteristics of the exposures to which the estimates are applied. EAD estimates applied to particular exposures must not be based on data that co-mingle the effects of disparate characteristics or data from exposures that exhibit different characteristics. EAD estimates must be based on appropriately homogenous segments or an estimation approach that disentangles effectively the impact of the different characteristics exhibited within the relevant dataset.
 9.          Where an ADI estimates CCFs directly, it must ensure that those estimates are quarantined effectively from the potential effects of the region of instability associated with facilities that are close to being fully drawn at the reference date.
10.      EAD reference data must not be capped at the principal amount outstanding or facility limits. Accrued interest, other due payments and limit excesses must be included in EAD reference data.
11.      The minimum data observation period for EAD estimation is five years from at least one data source. If the available observation period spans a longer period from any source and the data are relevant and material, this longer period must be used. The less data an ADI has, the more conservative it must be in its estimation of EAD.

Risk quantification requirements specific to expected loss
 1.      For each defaulted exposure, an ADI using the AIRB or retail IRB approach must construct its best estimate of EL for that exposure based on current economic circumstances and the facility's status. The mechanical application of a long-run average or downturn LGD estimate is not acceptable for this purpose. Instances where the best estimate of EL on a defaulted exposure is less than the sum of provisions and partial write-offs on that exposure must be justified to APRA by the ADI.

Validation of internal estimates
 1.      An ADI must have a robust and documented system in place to validate the accuracy and consistency of rating systems, processes and the estimation of all relevant credit risk components. The ADI must ensure that the internal validation process enables it to assess the performance of its internal rating and credit risk estimation systems in a meaningful and consistent manner.
 2.      Validation must be undertaken at least annually by personnel that are independent 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