Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p29
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 78679–81717

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 PD. Subject to the exceptions set out in paragraph 7 of this Attachment, an ADI must assign the same borrower grade to separate exposures to the same borrower irrespective of any differences in the nature of each specific transaction.
 3.              An ADI may assign different borrower grades to separate exposures to the same borrower in the following circumstances:
        1.           in the case of country transfer risk, the ADI may assign different borrower grades depending on whether the facility is denominated in domestic or foreign currency; and
        2.           where the treatment of associated guarantees or credit derivatives to a facility is reflected in an adjustment to the borrower grade.
 4.              A borrower grade must represent an assessment of borrower risk on the basis of a specified and distinct set of rating criteria from which estimates of PD are derived. An ADI's credit policies must articulate the:
        1.           relationship between borrower grades in terms of the level of credit risk each grade implies. Perceived and measured credit risk must increase as credit quality declines from one grade to the next; and
        2.           credit risk of each borrower grade in terms of both a description of the default risk typical for borrowers assigned to the grade and the criteria used to distinguish that level of credit risk. Modifiers such as '+' or '-' to alpha or numeric borrower grades will only qualify as distinct grades if the ADI has developed complete rating descriptions and criteria for their assignment and separately quantifies PD estimates for those modified grades.
 5.              The facility grade must reflect transaction-specific factors such as collateral, seniority and product type; that is, it must solely reflect LGD. Borrower characteristics may be included as LGD rating criteria only to the extent that they are predictive of LGD. However, under the FIRB approach an ADI may satisfy this requirement by using a facility grade dimension that reflects both borrower and transaction-specific factors. The criteria used to define facility grades must be grounded in empirical evidence.
 6.          Specialised lending exposures subject to the supervisory slotting approach are excluded from the two-dimensional rating requirement. In this case, an ADI may have a single rating dimension that reflects EL by incorporating both PD and LGD considerations.

Requirements for retail exposures
 1.          Rating systems for retail exposures must be oriented to both borrower and transaction risks and capture all relevant borrower and transaction characteristics. An ADI must assign retail exposures into particular pools separately reflecting PD, LGD