Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p31
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 84167–87197

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 into a single grade.
 4.          An ADI using the supervisory slotting approach for specialised lending exposures must have at least four rating grades for non-defaulted borrowers and one for defaulted borrowers.

Requirements for retail exposures
 1.          An ADI must be able to provide quantitative measures of PD, LGD and EAD for each identified pool of retail exposures. The level of differentiation must ensure that the number of exposures in a given pool is sufficient to allow for meaningful quantification and validation of PD, LGD and EAD estimates at the pool level. There must also be a meaningful distribution of exposures across pools, with no single pool comprising an undue concentration of exposures.

Rating criteria

Requirements for all exposures
 1.          An ADI must have specific rating definitions, processes and criteria for assigning exposures to grades or pools within a rating system. The rating definitions and criteria must be plausible, intuitive and result in a meaningful differentiation of risk.
 2.          An ADI's internal rating descriptions and criteria must be sufficiently detailed to allow officers to consistently assign the same rating to borrowers and facilities posing similar risk, across lines of business, departments and geographic locations. If rating criteria and processes differ for different types of borrowers or facilities, the ADI must monitor for possible inconsistency in rating assignments and alter rating criteria and processes to improve consistency where appropriate.
 3.          Rating definitions must be sufficiently clear and detailed to allow independent third parties, including APRA, to understand the assignment of ratings, replicate rating assignments and evaluate the appropriateness of the assignment of exposures to grades or pools.
 4.          The rating criteria must be consistent with an ADI's lending standards and its policies for managing borrowers and facilities that have deteriorated in credit quality.
 5.          An ADI must use all relevant, material and available information in assigning borrowers and facilities to grades or pools. The information used by the ADI must be current. The less information the ADI has, the more conservative it must be in assigning exposures to borrower and facility grades or pools. An external rating may be used as an input into the assignment process; however, the ADI must ensure that it considers all other relevant material information.

Additional requirements for specialised lending exposures subject to the supervisory slotting approach
 1.          An ADI using the supervisory slotting approach must assign specialised lending exposures to its internal rating grades based on its own criteria, systems and processes. The ADI must also