Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p7
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 16874–20309

performance of the rating process, areas requiring improvement and the status of efforts to improve previously identified deficiencies.
 3.          Internal ratings must be an essential part of the reporting to the Board and senior management. Reporting must include:
        1.           risk profile by grade;
        2.           migration across borrower grades;
        3.           quantitative estimates of the relevant parameters for each borrower grade and, where relevant, facility grade; and
        4.           comparison of realised default rates (and, where relevant, realised LGD and EAD rates) against expectations.
    Reporting frequencies may vary with the significance and type of information and the level of the recipients.
 1.          An ADI must have documented policies that detail sound rating system development, validation, implementation, governance and control processes. These policies must:
        1.           be approved and actively discussed by the ADI's Board or a delegated committee;
        2.           define the roles and responsibilities of parties involved in rating system development, validation, approval and implementation;
        3.           be actively enforced by senior management;
        4.           outline the processes for the development, validation, approval, implementation and governance of all rating and estimation processes. This must include the formation of:
                1.             a register that documents the specification, application, risk classification (materiality) and owner of each rating system;
                2.          a change log covering all rating system changes; and
                3.        a centralised issues register that records issues relating to each rating system; and
        5.           outline an ongoing monitoring and validation cycle for each rating system.

Credit risk control
 1.          An ADI must have an independent credit risk control unit that is responsible for the design or selection, implementation and performance of the ADI's rating systems. The unit must be functionally independent of the personnel and management functions responsible for originating exposures. Areas of responsibility must include:
        1.           testing and monitoring internal borrower and facility grades, and pools;
        2.           production and analysis of summary reports from the ADI's rating systems, including historical default data sorted by the rating at the time of default and one year prior to default, migration analysis and monitoring of trends in key rating criteria;
        3.           implementing procedures to verify that rating definitions are consistently applied across business units and geographic areas;
        4.           reviewing and documenting any changes to the rating process, including the reasons for those changes; and
        5.           reviewing the rating criteria to evaluate if they remain predictive of risk.
 2.          The credit risk control unit must actively participate in the development, selection, implementation and validation of rating models. It must assume oversight and supervision responsibilities for any models used in the rating process and have ultimate responsibility for the ongoing review of, and alterations to, the ADI's rating models.
 3.          In order to ensure proper accountability, an ADI's policies must clearly define and document