Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p30
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 81424–84416

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 and EAD. The ADI must ensure that this process provides for a meaningful differentiation and ranking of risk, a grouping of sufficiently homogenous exposures, and accurate and consistent estimation of PD, LGD and EAD at the pool level. Different pools of retail exposures may share identical PD, LGD or EAD estimates.
 2.          At a minimum, an ADI must consider the following risk drivers when assigning retail exposures to a pool:
        1.           borrower risk characteristics (e.g. borrower type, demographics such as age and occupation);
        2.           transaction risk characteristics including product or collateral (e.g. loan-to-valuation measures, seasoning, guarantees or credit derivatives and seniority (first or second liens)). The ADI must explicitly address cross-collateral provisions where present; and
        3.           delinquency of the exposure. The ADI must be able to separately identify exposures that are delinquent and those that are not.
 3.          For each pool where an ADI estimates PD and LGD, it must analyse the representativeness of the age of facilities (in terms of the time since origination for PD and the time since default for LGD) in the data used to derive the estimates. The ADI must adjust its estimates upward to account for a lack of representativeness in the data as well as anticipated implications of rapid exposure growth that may lead to default rates peaking several years after origination.

Rating structure

Requirements for corporate, sovereign and financial institution exposures
 1.          An ADI must have a sufficient number of distinct rating grades to allow for a meaningful distribution of exposures, with no excessive concentrations in either its borrower grades or, where relevant, facility grades.
 2.          Subject to the exception set out in paragraph 17 of this Attachment, an ADI must have a minimum of seven borrower grades for non-defaulted borrowers and one for defaulted borrowers. An ADI with lending activities focused on a particular market segment may satisfy this requirement with the minimum number of grades. An ADI that lends to borrowers of diverse credit quality should have a greater number of borrower grades. Significant concentrations within a single borrower grade or grades must be supported by empirical evidence that the grade or grades cover reasonably narrow PD bands and that the default risk posed by borrowers in each grade fall within the relevant band.
 3.          There is no minimum number of facility grades for an ADI using the AIRB approach; however, the ADI must have a sufficient number of facility grades to avoid grouping facilities with widely varying LGD estimates