Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p41
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 111472–114362

its estimation of LGD.

Additional requirements for defaulted exposures
 1.          The LGD assigned to a defaulted exposure must reflect the possibility that an ADI may have to recognise additional UL during the recovery period.

Risk quantification requirements specific to exposure at default estimation

Requirements for revolving retail exposures
 1.          An ADI must have procedures in place for the estimation of EAD for its off-balance sheet exposures. Estimates of EAD must reflect the possibility of additional drawings by the borrower up to the time a default event is triggered. However, additional drawings after the time of default must not be reflected in EAD and must instead be included in LGD. Where estimates of EAD differ by facility type, the delineation of these facilities must be clear and unambiguous.
 2.          An ADI must assign an estimate of EAD for each facility. EAD must be an estimate of the long-run default-weighted average EAD for similar facilities and borrowers over a sufficiently long period of time, with a margin of conservatism appropriate to the likely range of errors in the estimate. If a positive correlation can reasonably be expected between the default frequency and the magnitude of EAD, the EAD estimate must incorporate a larger margin of conservatism.
 3.          For exposures where EAD estimates are volatile over the economic cycle, an ADI must use EAD estimates that are appropriate for an economic downturn if these are more conservative than the long-run default-weighted average.
 4.          The criteria by which estimates of EAD are derived must be plausible, intuitive and represent what an ADI believes to be the material drivers of EAD. The criteria must be supported by credible internal analysis by the ADI. The ADI must be able to provide a breakdown of its EAD experience by the factors it sees as the drivers of EAD. The ADI must use all relevant and material information in its determination of EAD estimates.
 5.          An ADI's EAD estimates must give due consideration to its policies and procedures in respect of account monitoring and payment processing. The ADI must consider its ability and willingness to prevent further drawings in circumstances short of payment default, such as covenant violations or other technical default events.
 6.          An ADI must have systems and procedures in place to monitor, on a daily basis, facility amounts, outstanding amounts against committed lines and changes in outstanding amounts for each borrower and borrower grade or pool.
 7.          An ADI's EAD estimates must be developed using 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