Document ID: chunk:federal_register_of_legislation:F2022L01576:body:0:p12
Version: federal_register_of_legislation:F2022L01576
Segment Type: other
Provision Reference: 
Character Range: 31893–34957

and complexity of its operations, an ADI must have in place an internal credit risk grading system.
68.         An ADI must have in place prudent policies and processes governing the development, validation, operation and oversight of its credit risk grading system.
69.         Coverage of the credit risk grading system must extend to as much of the ADI's credit portfolio as possible, including off-balance sheet exposures. The credit risk grading system must meaningfully assess and differentiate risk and be able to rank risk consistently and through time. A sufficient number of risk grades must be included to ensure that the system adequately captures gradation of risk and the definitions and criteria for each risk grade must be plausible and intuitive.

Stress testing
70.         An ADI must take into consideration potential future changes in economic conditions when assessing individual exposures and its credit portfolio, and must assess its credit risk exposures under stressed conditions.
71.         An ADI must undertake regular portfolio level and risk specific stress testing of its credit exposures.
72.         The complexity and granularity of an ADI's stress testing must take into account the nature and scale of the ADI's credit portfolio. An ADI must conduct stress testing at a sufficiently granular level to enable adequate sensitivity to the risk characteristics of different exposure types. Scenarios used for stress testing must include severe but plausible adverse conditions.
73.         An ADI must consider the results of stress testing in its overall limit setting and monitoring process.
74.         Stress testing analyses must include contingency plans regarding actions the Board and senior management may take given certain scenarios.
75.         An ADI's stress testing arrangements must include well-documented and sound policies and processes governing the stress testing program, including the timely communication of information on scenarios, key assumptions, results and capital impacts to the ADI's Board and senior management.
76.         Stress testing models must be appropriately validated and checked independently or by an appropriately qualified external party.

Controls over credit risk

Review of credit risk management processes
77.         An ADI must establish a system of independent, regular reviews of the ADI's credit risk management processes and practices (refer to paragraph 29(e) of this Prudential Standard) and the results of such reviews must be communicated directly to the Board and senior management.

Internal controls and limits
78.         An ADI must ensure that the credit origination, credit assessment and approval function is properly managed and that credit exposures are within levels consistent with an ADI's limits. An ADI must establish and enforce internal controls and other practices to ensure that overrides, waivers or exceptions to policies, processes and limits are reported in a timely manner to the appropriate level of management for action.

Systems for remedial