Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p37
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 100799–103738

ADI must retain data used in the process of allocating retail exposures to pools. This includes data on borrower and transaction risk characteristics used either directly or through the use of a model as well as data on delinquency.
 2.          An ADI must retain data on PD, LGD and EAD estimates associated with its pools of retail exposures.
 3.          An ADI must retain data on loss rates in order to allow analysis of the volatility of loss rates for exposures in the QRR asset class compared to other types of retail lending.
 4.          For defaulted exposures, an ADI must retain data on the pools to which the retail exposure was assigned over the year prior to default and the realised outcomes on LGD and EAD.

Stress tests in the assessment of capital adequacy
 1.          An ADI must have sound stress testing processes in place for use in the assessment of its capital adequacy, including the sufficiency of the IRB capital requirement. Stress testing must include:
        1.           the identification of possible events or severe changes in economic conditions that could have unfavourable effects on the ADI's credit exposures; and
        2.           an assessment of the ADI's ability to withstand such events or changes.
 2.          An ADI must also perform one or more credit risk stress tests to assess the effect of certain conditions on its IRB capital requirement. For this purpose, the ADI must, at a minimum, consider the effect of mild recession scenarios. The stress tests must be meaningful and conservative.

Use of internal ratings
 1.          Internal ratings and PD, LGD and EAD estimates must play an integral role in the credit approval, risk management, internal capital allocation and governance functions of an ADI. Rating systems and estimates designed and implemented exclusively for the purpose of qualifying for an IRB approach and used only to provide IRB inputs are not acceptable.
 2.          Where there are differences between the credit risk estimates used by an ADI for Regulatory Capital and internal purposes, the ADI must:
        1.           ensure that the data sources and methodologies utilised for determining its internal credit risk estimates are consistent with the estimates used to determine the Regulatory Capital requirement; and
        2.           be able to justify, to APRA's satisfaction, the reasonableness of those differences.

Risk quantification

Overall requirements for estimation
 1.          Internal estimates of PD, LGD and EAD must be reviewed on at least an annual basis and incorporate all relevant, material and available data and other information. In determining these estimates, an ADI may utilise internal data and relevant data from external sources (including pooled data).
 2.          Estimates must be grounded in historical experience and empirical evidence, and not based purely on subjective considerations. Changes in an ADI's