Back Custom print Link Text Only Rich Text Print

  • (i) Rating Dimensions

    • — Standards for Corporate, Sovereign, and Bank Exposures

      • CA-5.8.10

        A qualifying IRB rating system must have two separate and distinct dimensions: (i) the risk of borrower default, and (ii) transaction-specific factors.

        Apr 08

      • CA-5.8.11

        The first dimension must be oriented to the risk of borrower default. Separate exposures to the same borrower must be assigned to the same borrower grade, irrespective of any differences in the nature of each specific transaction. There are two exceptions to this. Firstly, in the case of country transfer risk, where a bank may assign different borrower grades depending on whether the facility is denominated in local or foreign currency. Secondly, when the treatment of associated guarantees to a facility may be reflected in an adjusted borrower grade. In either case, separate exposures may result in multiple grades for the same borrower. A bank must articulate in its credit policy the relationship between borrower grades in terms of the level of risk each grade implies. Perceived and measured risk must increase as credit quality declines from one grade to the next. The policy must articulate the risk of each grade in terms of both a description of the probability of default risk typical for borrowers assigned the grade and the criteria used to distinguish that level of credit risk.

        Apr 08

      • CA-5.8.12

        The second dimension must reflect transaction-specific factors, such as collateral, seniority, product type, etc. This requirement can be fulfilled by the existence of a facility dimension, which reflects both borrower and transaction-specific factors. For example, a rating dimension that reflects EL by incorporating both borrower strength (PD) and CBB's loss severity (LGD) considerations would qualify.

        Apr 08

      • CA-5.8.13

        Banks using the supervisory slotting criteria for the SL sub-class are exempt from this two-dimensional requirement for these exposures. Given the interdependence between borrower/transaction characteristics in SL, banks may satisfy the requirements under this heading through a single rating dimension that reflects EL by incorporating both borrower strength (PD) and CBB's loss severity (LGD) considerations. This exemption does not apply to banks using the general corporate foundation approach for the SL sub- class.

        Apr 08

    • — Standards for Retail Exposures

      • CA-5.8.14

        Rating systems for retail exposures must be oriented to both borrower and transaction risk, and must capture all relevant borrower and transaction characteristics. Banks must assign each exposure that falls within the definition of retail for IRB purposes into a particular pool. Banks must demonstrate that this process provides for a meaningful differentiation of risk, provides for a grouping of sufficiently homogenous exposures, and allows for accurate and consistent estimation of loss characteristics at pool level.

        Apr 08

      • CA-5.8.15

        For each pool, banks must estimate PD, LGD, and EAD. Multiple pools may share identical PD, LGD and EAD estimates. At a minimum, banks must consider the following risk drivers when assigning exposures to a pool:

        (a) Borrower risk characteristics (e.g. borrower type, demographics such as age/occupation);
        (b) Transaction risk characteristics, including product and/or collateral types (e.g. loan to value measures, seasoning, guarantees; and seniority (first vs. second lien)). Banks must explicitly address cross-collateral provisions where present.
        (c) Delinquency of exposure: Banks are expected to separately identify exposures that are delinquent and those that are not.
        Apr 08