Document ID: chunk:federal_register_of_legislation:F2024L01074:body:0:p5
Version: federal_register_of_legislation:F2024L01074
Segment Type: other
Provision Reference: 
Character Range: 11396–14352

in APS 112;
       22.           purchased receivables – means a pool of receivables that has been purchased by the ADI from another entity;
       23.         rating system – means all of the methods, processes, controls, data collection and technology that support the assessment of credit risk, the assignment of internal credit risk ratings and the quantification of associated default, exposure and loss estimates;
       24.           regulated financial institution – means a financial institution that is subject to prudential requirements that are broadly equivalent to APRA's prudential requirement, or is part of a group where any material legal entity within the group is subject to prudential requirements that are broadly equivalent to those set by APRA;
       25.           revolving exposure – means an exposure where a borrower's outstanding balance is permitted to fluctuate based on their decision to borrow and repay, up to a limit established by the ADI. This does not include exposures that allow prepayments and subsequent redraws of those prepayments;
       26.           risk component – means the ADI's internal estimate, or a supervisory estimate provided in this Prudential Standard, of probability of default, loss given default, exposure at default or effective maturity required as inputs to the risk-weight functions;
       27.        risk-weight function – means the calculation method that transforms the risk components into the capital requirement for unexpected loss;
(ab)   securities financing transaction (SFT) – has the meaning given in APS 112;
(ac)   sovereign – has the meaning given in APS 112;
(ad)  specialised lending – has the meaning given in APS 112 but also includes IPRE as defined in this Prudential Standard;
(ae)   unexpected loss (UL) – means the credit loss in excess of expected loss; and
(af)   unregulated financial institution – means a financial institution that is not a regulated financial institution.

Key principles
 1.          An ADI that has received IRB approval from APRA may rely on its internal estimates for some, or all, of the risk components required as inputs to the risk-weight functions used in determining the Regulatory Capital requirement for credit exposures. The risk components include measures of PD, LGD, EAD and M.
 2.          An ADI must meet the relevant minimum requirements detailed in this Prudential Standard to use an IRB approach for a given asset class.
 3.          An ADI must apply a foundation IRB (FIRB), advanced IRB (AIRB), retail IRB or supervisory slotting approach to a given asset class in accordance with its IRB approval and subject to the constraints set out in paragraph 18 of this Prudential Standard. Where the ADI uses the:
        1.           FIRB approach, it must provide its own estimates of PD and M, and rely on supervisory estimates for LGD and EAD;
        2.           AIRB approach, it must provide its own estimates of PD,