Template: Retail
TABLE OF CONTENTS:
Section
Section 1.
Section 2.
Section 3.
3.1.
3.2.
3.3.
3.4.
Section 4.
4.1.
4.2.
4.3.
4.4.
Section 5.
5.1.
5.2.
5.3.
5.4.
5.5.
Section 6.
6.1.
6.2.
6.3.
6.4.
6.5.
Section 7.
7.1
7.2
7.3
7.4
7.5.
Section 8.
8.1.
8.2.
8.3
8.4
8.5.
8.6.
8.7.
Section 9.
Section 10.
Section 11.
Section name
Application
Asset categorisation
Rating system
 Assignment of exposures to rating systems
 Definition of default
 Ratings Criteria
 Overrides
PD estimation
 Data
 Methodology
 Calibration
 Accuracy of Estimates
LGD estimation
 Data
 Methodology
 Parameter Estimation
 Accuracy of Estimates
 Downturn LGD
EAD estimation
 Data
 Methodology
 Parameter Estimation
 Accuracy of Estimates
 Downturn EAD
Criteria for the recognition of credit risk mitigation instruments
- On-balance sheet netting
-
Page number
Collateral
Guarantees
- Credit Derivative Instruments
- Double default
Process and control environment
 Independent validation
 Controls over the use of models
 Data maintenance
 Credit policy
 Documentation
 Controls relating to overdraft facilities
 Controls relating to unutilised facilities
Use test
Experience test
Stress Testing
2
Regulation
1.
1.1
1.2
1.3
Application
Subject to the relevant provisions
of
regulation
38(2)
and
subregulation (20), a bank that
wishes to adopt the IRB approach
for the measurement of the bank’s
exposure to credit risk(a) shall obtain the prior written
approval of the Registrar; Should
the Registrar grant his/her
approval, the bank shall in addition
to the minimum requirements
relating to the Internal Ratings
Based (‘IRB’) approach specified in
subregulation
(11)(b)
below,
continuously comply with such
conditions as may be specified in
writing by the Registrar;
(b) shall calculate its exposure to
credit risk, at the discretion of the
bank, either in accordance with
the provisions of Method 1, as set
out in subregulations (11) and (12)
below, or Method 2, as set out in
subregulations (13) and (14)
below, or, subject to such
conditions as may be specified in
writing by the Registrar, a
combination of the said methods.
(b) shall calculate its exposure to
credit risk, at the discretion of the
bank, either in accordance with
the provisions of Method 1, as set
out in subregulations (11) and (12)
below, or Method 2, as set out in
subregulations (13) and (14)
below, or, subject to such
conditions as may be specified in
writing by the Registrar, a
combination of the said methods.
(i) Subject to such conditions as
may be specified in writing by the
Registrar, a bank that adopted the
IRB approach for the calculation of
the bank’s exposure to credit risk
in respect of positions held in the
bank’s banking book shall apply
the said approach in respect of all
the bank’s material asset classes
and business units. (B2 p256) (PP
21 ND46, ND47, ND49, ND50)
Criteria
Attest procedures
Model approval has been
obtained by the SARB.
1.1.1. Obtain
the
SARB
approval letter and confirm
with management that model
approval has been obtained.
Bank practice and Findings
Management comments
1.1.2. Inspect the letter of
acceptance and assess any
restrictions or limitations
imposed by the SARB.
For those areas for which
model approval has been
obtained (and which are
not excluded from the IRB
approach on the basis of
immateriality
–
see
below), capital for all
exposures is calculated
using the models.
1.2.1. Test the reconciliation of
all exposures in the banking
book to the bank’s model
register.
Where the bank applies
the IRB approach, it is
applied to all material
asset classes and business
units.
1.3.1. From a review of the
reconciliation of all exposures
to the model register, and
review of board
documentation, identify all
exposures which are not
subject to the IRB approach on
the basis of immateriality.
The board has approved
asset classes and business
units excluded from the
foundation IRB approach
in accordance with the
approved
materiality
threshold.
1.2.2. Assess the materiality of
exposures for which capital
should be determined using
the IRB approach, but which do
not map to the IRB models (i.e.
capital is determined offmodel).
1.3.2. Test that the Risk
Weighted Assets (‘RWA’) of
these exposures falls within
the materiality limit imposed
by the SARB, using the
3
Regulation
1.
1.4
Criteria
Attest procedures
Senior management
monitors the RWA of the
excluded asset classes /
business units relative to
the total RWA against the
materiality threshold.
information contained in the
BA 200.
Where the bank applies
the IRB approach to its
exposure
to
a
securitisation scheme, it
also applies the IRB
approach
to
the
underlying
credit
exposure.
1.4.1. Test that where the bank
applies the IRB approach to its
exposure to a securitisation
scheme, it also applies the IRB
approach to the underlying
credit exposure.
Bank practice and Findings
Management comments
Application
(v) shall apply the IRB approach for
the measurement of the bank’s
exposure
relating
to
a
securitisation scheme, that is, a
bank shall not use the IRB
approach for the measurement of
the bank’s exposure in respect of a
securitisation scheme unless the
bank obtained the prior written
approval of the Registrar to apply
the IRB approach for the
measurement of the bank’s
exposure to underlying credit
exposure, provided that the bank
shall in respect of the said
securitisation exposures comply
with the relevant requirements
specified in paragraph (b)(xii)
below. (B2 p606 to p643) (PP21
ND81, ND82)
4
Regulation
2
Criteria
Attest procedures
Bank practice and Findings
Management comments
Asset categorisation
5
Regulation
3
Rating system
Rating System Overview:
3.1
3.1.1
3.1.2
Criteria
Assignment of exposures to rating systems
(11)(b)(iv)(A)(i) A Bank that uses The bank has a documented process
multiple systems to support its for determining which exposures are
assessment of credit risk shall duly assigned to which rating systems;
document the rationale for assigning the policy has been consistently
a particular obligor to a particular applied.
rating system;
(11)(b)(iv)(A)(ii) A Bank that uses
multiple systems to support its
assessment of credit risk shall duly
document the specific industries or
market segments to which a
particular rating system applies;
(11)(b)(iv)(A) A bank that uses
multiple systems to support its
assessment of credit risk shall duly
document
(i) the rationale for assigning a
particular obligor to a particular
rating system;
(ii) the specific industries or market
segments to which a particular
rating system applies;
Where neighbouring models exist,
ensure that the routing rules assign
a particular obligor to a rating
system that best represents the
characteristics of the obligor and
rating system.
Attest procedures
Bank practice and Findings
3.1.1.1 Inspect that the developmental
evidence includes a description of the loan
criteria that distinguish the loans that will be
assigned to the rating system.
3.1.1.2 For a sample of exposures, determine
whether the documented criteria for assigning
obligors to the rating system have been
correctly applied.
3.1.2.1 Inspect the developmental evidence to
identify whether it is possible for obligors to be
rated on multiple systems.
3.1.2.2 If an obligor can be rated on multiple
systems evaluate and document in the findings
rationale used by management for choosing
the rating system used.
3.1.2.3 Determine whether the documented
procedure has been correctly applied.
6
Management comments
3.2
3.2.1
Regulation
Definition of default
(11)(b)(vi)(B)(iii) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures estimate
a PD ratio and a LGD ratio in respect
of each retail pool of exposures,
which PD estimate and LGD
estimate-(iii) shall be based on the
definition of default, specified in
regulation 67;
Criteria
The bank calculates risk parameters
relative to a definition of default
that is compliance with Regulation
67. The definition of default is
consistently applied between PD,
LGD and EAD models.
Attest procedures
3.2.1.1 Inspect the developmental evidence
and document the definition of default applied
by the Bank.
3.2.1.2. Confirm that the documented
definition is applied consistently within the PD,
LGD and EAD models.
3.2.1.3. Compare the definition
management to the definition
Regulations and document any
noted between the two and
thereof.
(13)(b)(v)(C)(iii) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s exposure
to credit risk shall estimate an
appropriate LGD ratio in respect of
all relevant facilities and asset
classes, which LGD ratio shall be
based on the definition of default,
specified in regulation 67.
Bank practice and Findings
applied by
within the
differences
the impact
3.2.1.4 Confirm by inspection of the underlying
data that the field(s) used to identify defaults
in PD, LGD and EAD models is consistent.
[(13)(b)(v)(D) Unless specifically
otherwise provided in sub-regulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s exposure
to credit risk shall estimate an
appropriate EAD amount in respect
of all relevant facilities and asset
classes.]
(vii) The EAD estimate shall be based
on the definition of default, specified
in regulation 67.
3.2.2
(11)(b)(vi)(D) When the status of a
previously
defaulted
exposure
subsequently changes, and as such
no longer constitutes a defaulted
exposure, the reporting Bank shall
rate the relevant obligor and
estimate the relevant LGD ratio in a
manner similar to a non-defaulted
facility, provided that when the
relevant exposure subsequently
triggers one of the criteria relating to
default, which criteria are specified
in regulation 67, the relevant Bank
shall record a second default in
respect of the said exposure.
Documentation contains clear
procedures for curing.
Circumstances under which curing is
allowed are clearly articulated. The
bank applies the documented curing
procedures consistently for PD, LGD
and EAD calculations in a manner in
line with regulatory requirements.
3.2.2.1 Inspect the documentation and
document the curing policy and procedures
used by management.
3.2.2.2 Confirm that cured accounts have been
identified for PD, LGD and EAD in line with
management’s policy
3.2.2.3 Confirm that the bank has applied
curing procedures consistently for PD, LGD and
EAD calculations in a manner in line with
regulatory requirements.
7
Management comments
3.
3.3
3.3.1
Regulation
Rating system
Rating criteria
(11)(b)(v)(D) Without derogating
from
the
provisions
of
subparagraphs (i) to (iv), the rating
and risk estimation systems and
processes of a bank that adopted
the IRB approach for the
measurement of the bank’s
exposure to credit risk in respect of
positions held in the bank’s banking
book – shall in the case of retail
exposures –
(i) be oriented towards
comprehensively capture –
and
(aa) borrower risk, which borrower
risk shall include matters such as
borrower and demographics such as
age or occupation; and
(bb) transaction risk, which
transaction risk shall include
matters relating to product and
collateral types such as loan to
value measures, guarantees and
seniority;
3.3.2
3.3.3.
(cc) the delinquency status of all
relevant exposures, that is, the bank
shall separately identify exposures
that are delinquent and exposures
that are not delinquent;
(11)(b)(v)(E)(iv) Ratings definitions
and criteria shall be consistent with
the
bank’s
internal
lending
standards.
(11)(b)(v)(E)(vi) Without derogating
from
the
provisions
of
subparagraphs (i) to (iv), the rating
and risk estimation systems and
processes of a bank that adopted
the IRB approach for the
measurement of the bank’s
exposure to credit risk in respect of
positions held in the bank’s banking
book – shall make provision for
specific rating definitions and
criteria in order to assign exposures
to relevant risk grades, which
definitions and criteria shall
Criteria
Attest procedures
The bank shall consider factors
relating to all of the following when
developing models within the rating
system:
3.3.1.1 Inspect developmental evidence for
evidence that the factors included in the
models that form part of the rating system
reflect all of the following dimensions:
(aa) borrower risk, which borrower
risk shall include matters such as
borrower type and demographics
such as age or occupation; and
(aa) borrower risk
(bb) transaction risk
(cc) the delinquency status
(bb) transaction risk, which
transaction risk shall include matters
relating to product and collateral
types such as loan to value
measures, guarantees and seniority;
and
Bank practice and Findings
3.3.1.2 If risk factors from all three broad risk
groupings are not present in the current
models, assess if risk factors across the 3 risk
groups have been considered at development
of the models and documented.
(cc) the delinquency status of all
relevant exposures, that is, the bank
shall separately identify exposures
that are delinquent and exposures
that are not;
The set of rating factors and criteria
used in the IRB model framework
should be consistent with the
internal lending standards of the
bank. The internal lending standards
include the criteria used to
differentiate risk of customers and
the criteria underlying the
sanctioning process
3.3.2.1 Confirm that the factors considered in
the modelling process are consistent with
those used in economic capital and lending
models.
The independent validation unit
considers the relevance of ratings
criteria and definitions periodically
as part of their program of work.
3.3.3.1 Inspect the independent validation
function’s program of work for evidence that it
covers periodic evaluation of the continued
relevance of the ratings criteria and definitions.
8
Management comments
3.
Regulation
Rating system
periodically be reviewed in order to
ensure that the definitions and
criteria remain relevant and
current.
3.4.
Overrides
3.4.1
(11)(b)(v)(G)(viii) Statistical models
and mechanical methods to assign
ratings shall be subject to written
policies and procedures for human
review and judgment provided that
when human judgment is used to
override the model’s output, the
bank shall separately keep track of
the performance of the relevant
exposure.
Criteria
Attest procedures
The bank has a written policy and
keeps track of any override to the
rating assigned. Where management
overrides play a role in the rating
process the bank will separately
track the performance of these
overrides.
3.4.1.1.
Inspect
supporting
evidence
evidencing the bank’s tracking of the volume
or amounts of overrides over the observed
period.
3.4.1.2. Inspect supporting evidence that the
bank reviews the performance of the overrides
separately to compare to the balance of the
population.
3.4.1.3 Inspect supporting evidence that
overrides are performed in line with the policy.
Where documented override tolerance limits
have been breached, document management’s
justification.
Bank practice and Findings
9
Management comments
Regulation
4
PD Estimation
Model overview:
4.1
4.1.1
4.1.2
Data
(11)(b)(vi)(B)(i) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures
estimate a PD ratio and a LGD ratio
in respect of each retail pool of
exposures, which PD estimate and
LGD estimate- shall be based on the
bank’s internal data as the primary
source of information
(11)(b)(vi)(B)(iv) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures
estimate a PD ratio and a LGD ratio
in respect of
each retail pool of exposures, which
PD estimate and LGD estimatemay rely on external data or
statistical models for quantification
provided that the bank shall
demonstrate to the satisfaction of
the Registrar a strong link between-
Criteria
Attest procedures
Estimates of PD for retail exposures
are based on internal data as the
primary source of information.
4.1.1.1 Inspect the developmental evidence to
confirm that the primary source of information
for PD estimation is internal data. Where
external data is used in addition to internal
data, assess management’s motivation for
considering internal data and not the external
data used to be the primary source of
information.
If external data or statistical models
are used for PD quantification, the
Bank assesses the process of
assigning exposures to a particular
pool of the external provider against
its own process. External data or
statistical models are only used
where a strong link is demonstrated.
Where external data or statistical
models are used, the external
portfolio is representative of the risk
profile of the current population.
(aa) the bank’s process of assigning
exposures to a particular
pool and the process used by the
external data source;
4.1.3
4.2
4.2.1
(bb) the bank’s internal risk profile
and the composition of the
external data;
(11)(b)(vi)(B)(ii) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures
estimate a PD ratio and a LGD ratio
in respect of each retail pool of
exposures, which PD estimate and
LGD estimate- shall be based on a
number of exposures in a particular
exposure pool that is sufficient to
allow for a meaningful
quantification and validation of the
loss characteristics;
Methodology
(13)(b)(v)(B) Unless specifically
otherwise provided in this
subregulation (13), a bank that
PD estimates are based on a
sufficiently large sample size to
allow for a meaningful quantification
and validation of the loss
characteristics.
Bank practice and Findings
4.1.2.1 Confirm through evaluation of
supporting evidence whether the bank has
used external data or statistical models in its
PD estimation.
4.1.2.2 If external data or statistical models are
used, determine whether the bank has
demonstrated that the process of assigning
exposures to pools of the external data
provider shows a strong link to the process
used by the bank.
4.1.2.3 If external data or statistical methods
are used, enquire with management that the
bank has assessed whether the external
portfolio is representative of the current
population.
4.1.3.1 Confirm through inspection of
underlying data whether the number of
exposures in each model segment is above
industry norms to allow for a meaningful
quantification and validation of the loss
characteristics, with reference to documented
internal standards.
4.1.3.2 Where not, enquire of management
and document in the findings the reasons and
quantification of any adjustments.
The bank estimates a PD ratio in
respect of each model segment.
4.2.1.1 Confirm through inspection of
underlying data and supporting documentation
whether a PD estimate is calculated for each
10
Management comments
4
4.2.2
Regulation
PD Estimation
adopted the advanced IRB approach
for the measurement of the bank’s
exposure to credit risk shall in the
case of retail exposures estimate a
PD ratio in respect of each relevant
retail pool of exposures, which PD
estimate shall comply with all the
minimum requirements specified in
subregulation (11)(b)(vi)(B) above;
(11)(b)(vi)(B)(x) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures estimate
a PD ratio and a LGD ratio in respect
of each retail pool of exposures,
which PD estimate and LGD
estimate- shall be based on long-run
Criteria
Attest procedures
Bank practice and Findings
model segment.
Retail IRB: Banks consistently use 1
of 3 methods:
1) Calculate PD and LGD
4.2.2.1 Assess developmental evidence to
confirm that the bank is calculating PD and
LGD estimates using 1 of the 3 permissible
methods.
2) Calculate EL and PD to infer LGD
3) Calculate EL and LGD to infer PD
average estimates of PD and defaultweighted average loss rates given
default, based on an estimate of the
expected long-run loss rate, provided
that(aa) the bank may use an
appropriate PD estimate to infer the
long-run default-weighted average
loss rate given default;
(bb) the bank may use a long-run
default-weighted average loss rate
given default to infer the appropriate
PD;
(cc) the LGD ratio used to calculate
the bank’s IRB capital requirement
shall not be less than the long-run
default-weighted average loss rate
given default;
4.2.3
(11)(b)(v)(E)(ii) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk in
respect of positions held in the
bank’s banking book shall make
provision for specific rating
definitions and criteria in order to
assign exposures to relevant risk
grades, which definitions and
criteria shall be sufficiently detailed
to allow(aa) persons responsible for
assigning of ratings to
consistently assign borrowers or
facilities that pose similar risk to the
For each rating model, there is a
clear definition and related set of
ratings criteria (risk factors and
attributes for risk factors including
weightings) for allocation of
exposures to risk grades.
The set of ratings criteria is
sufficiently detailed and objective to
permit the consistent assignment of
similar borrowers to the same
rating.
The set of ratings criteria is
sufficiently detailed and objective to
permit third parties such as the
internal audit department or an
4.2.3.1
Inspect
whether
the
model
documentation and supporting evidence
contains a definition of the rating criteria used
in the model and the weighting of rating
criteria, where applicable.
4.2.3.2 Inspect supporting documentation to
confirm whether the set of ratings criteria is
detailed and objective compared to industry
norms to permit the consistent assignment of
similar borrowers to the same rating.
4.2.3.3 Inspect supporting documentation to
confirm whether the documentation is
detailed enough to allow an understanding of
the assignment of ratings and to evaluate the
appropriateness of grade or pool assignments.
11
Management comments
4
4.2.4
Regulation
PD Estimation
same grade;
(bb) third parties such as the
internal audit department or an
equally independent function, and
the Registrar, to understand the
assignment of ratings and to
evaluate the appropriateness of the
grade or pool assignments;
(11)(b)(v)(E) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
shall make provision for specific
rating definitions and criteria in
order to assign exposures to
relevant risk grades, which
definitions and criteria-
Criteria
Attest procedures
Bank practice and Findings
equally independent function, and
the Registrar, to understand the
assignment of ratings and to
evaluate the appropriateness of the
grade or pool assignments
The bank considers a comprehensive
list of risk factors for possible
inclusion in the PD model.
The process followed by the bank to
select the final risk factors included
in the PD model ensures that the
risk factors are plausible and
intuitive.
(i) shall be plausible and intuitive in
order to ensure a meaningful
differentiation of risk
4.2.4.1 Enquire of management the process
followed to select the risk factors included in
the model, and compare this to management’s
documentation thereof. Note in the findings
any items stated by management that are not
included in the supporting documentation.
4.2.4.2 Enquire of management whether a
comprehensive list of risk factors was
considered for inclusion in the model.
4.2.4.2 Assess whether the final risk factors
selected are plausible and intuitive through
review of the bank’s motivation for including
these factors in the model.
(v) shall take into consideration all
relevant and material Information
4.2.5
4.2.6
(11)(b)(v)(G)(ii) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods shall be used
appropriately.
The bank has followed a robust
mathematical and statistical process
in developing the PD model. The
accuracy of the model output is
supported by appropriate statistical
or mathematical processes.
4.2.5.1 Inspect underlying documentation to
confirm whether the mathematical and
statistical methodology applied by the bank in
developing the PD model is documented to a
sufficient level to facilitate an understanding of
the model.
The bank has provided a detailed
outline of the theory, assumptions
and/or mathematical and empirical
basis of the assignment of PD
estimates to exposures.
4.2.5.2 Determine whether the methodology
applied is based on sound mathematical or
statistical techniques based on industry norms.
(11)(b)(v)(F) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk in
respect of positions held in the
bank’s
banking
book
shall
incorporate an appropriate time
horizon in order to assign a risk
rating to a borrower, which rating
shall be based on a sufficiently long
time horizon(i) to estimate an obligor’s
probability of default;
PD estimates are based on a
sufficiently long time horizon to
represent the borrower’s ability and
willingness to repay despite adverse
economic conditions or the
occurrence of unexpected events
4.2.6.1 Determine the time horizon used for PD
estimation.
4.2.5.3 Re-perform the mathematical and
statistical methodology applied by the bank to
develop the PD model, based on the
documentation provided.
4.2.6.2 Enquire of management the reasons
motivating the time horizon used and
determine whether the time horizon
represents the borrower’s ability and
willingness to repay despite adverse economic
conditions or the occurrence of unexpected
events.
4.2.6.3 If the time horizon used does not
represent the borrower’s ability and
12
Management comments
Regulation
PD Estimation
(ii) to represent the borrower’s
ability and willingness to repay
contractual obligations despite
adverse economic conditions or
the occurrence of unexpected
events;
(11)(b)(v)(G)(vi) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods shall not contain any
known material biases.
Criteria
The method used to estimate PD
ratios shall not contain any known
material biases.
4.2.7.1 Assess the methodology used to
estimate PD ratios and document any known
material biases identified therein.
4.2.8
Refer to Regulation (39)(7)
The final model has been approved
by the Board or its designated subcommittee.
4.2.8.1 Inspect supporting evidence indicating
that the final model has been approved by the
Board or its designated sub-committee.
4.3
4.3.1
Calibration
4
4.2.7
4.3.2
4.3.3
Attest procedures
Bank practice and Findings
willingness to repay despite adverse economic
conditions or the occurrence of unexpected
events, assess the impact on the PD estimates
and adjustments made.
(11)(b)(vi)(B)(vi) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures estimate
a PD ratio and a LGD ratio in respect
of each retail pool of exposures,
which PD estimate and LGD
estimate- shall be based on a
population of exposures that closely
matches or is at least comparable to
the bank’s existing exposures and
lending standards;
The
calibration
representative
of
population.
sample
is
the
current
(11)(b)(vi)(B)(v) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures
estimate a PD ratio and a LGD ratio
in respect of each retail pool of
exposures, which PD estimate and
LGD estimate- shall incorporate all
relevant and material information
Model inputs and development
data are reviewed by management
to ensure that all relevant and
material data and information is
incorporated.
(11)(b)(vi)(B)(vii) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures estimate
a PD ratio and a LGD ratio in respect
of each retail pool of exposures,
which PD estimate and LGD
estimate- shall be based on
economic and market conditions that
are relevant and current
The PD estimate is based on
economic and market conditions that
are relevant and current.
4.3.1.1
Inspect
and
evaluate
the
developmental evidence and underlying data
to confirm that the calibration data set is
representative of the bank’s existing exposures
and lending standards.
4.3.1.2 Where the data set is not
representative of current exposures and
lending standards, document the bank’s
evaluation of whether any differences are
sufficiently significant to result in bias. Evaluate
and document the reasonableness of this
assessment.
4.3.2.1
Inspect
the
relevant
source
documentation of the process for the review
and signoff of the model inputs and
development data and document accordingly.
4.3.2.2 Inspect the basis for any adjustments
and assess reasonableness s these adjustments
are made.
4.3.3.1 Inspect underlying data to confirm
whether the most recent bank specific data
available is used in PD estimation.
4.3.3.2 Where not, enquire and document
management’s motivation for this and assess
the reasonability thereof.
13
Management comments
4
4.3.4
Regulation
PD Estimation
(11)(b)(vi)(B)(ix) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures estimate
a PD ratio and a LGD ratio in respect
of each retail pool of exposures,
which PD estimate and LGD
estimate- shall be reviewed on a
regular basis but not less frequently
than once a year or when material
new information is obtained;
4.3.5
Criteria
Attest procedures
The Bank reviews PD estimates at
4.3.4.1 Inspect supporting documentation to
confirm that the bank has a documented
process for identifying new information
meeting management specified criteria that
would affect PD estimates. Document
management’s criteria.
least annually or when material new
information is obtained.
Bank practice and Findings
4.3.4.2 Inspect supporting documentation to
confirm that the Bank reviews PD estimates
annually or when new information meeting
management specified criteria is obtained. This
refers to the application of updated estimates
to exposures rather than to recalibration of the
PD model.
Bucketing: The bank has chosen an
approach to bucketing defaults
which results in an appropriate
number of observations and defaults
in each bucket such that a crude
default rate per bucket can be
calculated.
Tests of bucketing of scores:
Calculation of crude default rate:
The crude default rate is consistently
attributed to the same point in the
score bucket (e.g. average, max,
min)
4.3.5.2
Compare the bucketing approach
followed to the bank’s documented internal
bucketing requirements and industry norms.
Document and evaluate any differences noted.
Curve-fitting: The bank applies a
curve-fitting technique that achieves
a
reasonable
goodness-of-fit
measure
relative
to
other
techniques, and accurately predicts
defaults over the whole of the score
range.
Calculation of historical average long
term PD: The bank’s approach to
calculating long term average PD for
a portfolio reasonably reflects the
distribution of defaults over time
and is consistently applied.
4.3.5.1
If score bucketing is applied in the
calibration process, assess the bank’s
developmental evidence and rational for
adopting the bucketing methodology used. Reperform the bank’s bucketing approach.
Test calculation of crude default rate per
bucket:
4.3.5.3 Re-perform the calculation of crude
default rates per bucket using the
methodology documented by the bank. Inspect
whether crude default rates are consistently
attributed to the same point in the score
bucket and that the bank’s calculations do not
contain any bias.
Test curve-fitting:
4.3.5.4 Inspect the goodness-of-fit of the fitted
curve relative to the area where the majority
of exposures lie based on underlying data.
Tests of calculation of historical average long
term PD:
4.3.5.5 Inspect whether the bank’s calculation
method is adequately documented when
compared to industry norms.
4.3.5.6 Inspect underlying data and confirm
whether the method used by management is
consistent with industry norms given the
14
Management comments
4
Regulation
PD Estimation
Criteria
Attest procedures
Bank practice and Findings
distribution of defaults over time. Confirm that
the method is applied consistently over time.
4.3.5.7
Assess the work performed by the
bank to test the accuracy and completeness of
the data set used for calculation of the longrun average PD. Document any adjustments
that have been made by management to
ensure consistency of the data over time.
Test fit of PD curve to average long term PD:
4.3.5.8 Inspect supporting documentation to
confirm the method used by the bank (e.g.
scaling factor, Bayesian Theorem, etc.) to
adjust the fitted PD curve to the average longrun PD is documented.
4.3.5.9
Assess whether to confirm the
method applied is reasonable and inspect
underlying data to confirm it is applied as
documented.
.
4.3.6
4.3.7
4.4
4.4.1
(11)(b)(v)(D)(ii) The rating system
shall be sufficiently robust to ensure
that the bank assigns each retail
exposure to a relevant pool of retail
exposures to make provision for(aa) a meaningful differentiation of
risk, that is, there shall be a
meaningful
distribution
of
borrowers and exposures across the
relevant retail pools of exposure in
order to ensure that no single pool
of exposures results in undue
concentration in relation to the
bank’s total retail exposure;
11 (b) (v) D ii The rating system
shall be sufficiently robust to ensure
that the bank assigns each retail
exposure to a relevant pool of retail
exposures to make provision for(bb) a grouping of sufficiently
homogenous exposures provided
that the bank shall consider the risk
drivers in respect of borrower risk,
transaction risk and the delinquency
status of retail exposures when the
bank assigns a particular exposure
to a particular retail pool of
exposures;
Accuracy of Estimates
(13)(b)(ii)(C) For a minimum period
of three years or such lesser
minimum period as may be
The bank has a meaningful
distribution of exposures across PD
model segments; the bank does not
have excessive concentrations of
exposures in any one PD model
segment.
4.3.6.1 Determine whether the bank has
assessed the distribution of exposures across
PD model segments.
PD pools are based on sufficiently
homogeneous exposures. The bank
considers risk drivers in respect of
borrower risk, transaction risk and
delinquency status in assigning
exposures to PD model segments.
4.3.7.1 Determine whether PD model
segments are based on homogeneous
exposures, and whether the relevant risk
drivers are considered in the assignment of
exposures to PD model segments.
Backtesting:
The bank has a
documented backtesting program in
place.
4.3.6.2 Assess management’s motivation for
any concentrations observed.
4.4.1.1 Backtesting:
Inspect supporting
evidence to confirm whether the bank has
15
Management comments
4
4.4.2
Regulation
PD Estimation
specified in writing by the Registrar,
prior to a bank’s implementation of
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk, the rating
and risk estimation systems and
processes of the bank should have
provided materially accurate and
consistent quantitative estimates of
risk, including PD ratios, LGD ratios
and EAD amounts
(11)(b)(vi)(B)(viii) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures
estimate a PD ratio and a LGD ratio
in respect of each retail pool of
exposures, which PD estimate and
LGD estimate- shall be based on an
estimation technique that performs
well in out-of-sample tests
(13) Method 2: Calculation of
credit-risk exposure in terms of the
advanced IRB approach
(13)(b) Minimum requirements
(13)(b)(vi)(B) As a minimum, a bank
that adopted the advanced IRB
approach for the measurement of
the bank’s exposure to credit riskshall for each relevant risk grade
regularly compare realised PD
ratios, LGD ratios and EAD amounts
with estimated PD ratios, LGD ratios
and EAD amounts, and demonstrate
to the satisfaction of the Registrar
that the realised risk components
are within the expected range of
risk components for a particular
grade
Criteria
11 (b) v (G) iii and ix Statistical
models and mechanical methods to
assign borrower and facility ratings
shall have good predictive power.
The bank tests the predictive power
of the PD model. Thresholds for
acceptable results are documented.
The power testing includes both out
of time and out of sample
performance testing.
The bank establishes a rigorous
statistical process (including out-oftime
and
out-of-sample
performance tests) for validating
the model at development.
The Bank performs comparison of
actual historical PDs against modelpredicted PDs in accordance with
the
documented
backtesting
program.
Internal
actual
v
expected
thresholds are established in the
backtesting program.
Attest procedures
Bank practice and Findings
performed PD backtesting in accordance with a
documented backtesting program.
4.4.1.2 Assess whether results have been
assessed using documented internal guidelines
as per the bank’s backtesting program.
4.4.1.3 Where deviations are not acceptable
with reference to internal guidelines for
assessment of results, confirm that
management has justified the deviations
observed or specified actions to address the
deviations.
4.4.3.1 Inspect and re-calculate the tests
performed by the bank to assess the predictive
power of the PD model.
4.4.3.2 Confirm whether the tests applied are
consistent with industry norms (E.g. Gini,
power statistic, ROC).
4.4.3.3 Confirm that thresholds for acceptable
power test results are documented. Assess the
performance of the model with regard to these
tolerance levels.
4.4.3.4 Inspect the out of time and out of
sample calculation of the power of the rating
model, and document whether the change
over time is consistent with industry norms.
16
Management comments
Regulation
5.
LGD estimation
Model overview:
5.1
5.1.1
5.1.2
5.1.3
5.1.4
Data
(11)(b)(vi)(B)(i) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures
estimate a PD ratio and a LGD ratio
in respect of each retail pool of
exposures, which PD estimate and
LGD estimate – shall be based on
the Bank’s internal data as the
primary source of information.
(11)(b)(vi)(B)(iv) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures
estimate a PD ratio and a LGD ratio
in respect of each retail pool of
exposures, which PD estimate and
LGD estimate – may rely on external
data or statistical models for
quantification provided that the
Bank shall demonstrate to the
satisfaction of the Registrar a strong
link between(aa) the Bank’s process of assigning
exposures to a particular pool and
the process used by the external
data source;
(bb) the Bank’s internal risk profile
and the composition of the external
data;
(13)(b)(v)(C)(vii) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be based on historical recovery
rates and empirical evidence and
not, for example, solely on the
estimated
market
value
of
collateral.
(13)(b)(v)(C)(x) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be based on a sufficient
number of exposures and data
Criteria
Attest procedures
Estimates of the LGD for each retail
pool of exposures shall be based on
internal data as a primary source of
information
5.1.1.1 Inspect the developmental evidence to
confirm that the primary source of information
for LGD estimation is internal data. Where
external data is used in addition to internal
data, assess management’s motivation for
considering internal data and not the external
data used to be the primary source of
information.
If external data or statistical models
are used for LGD quantification, the
Bank assesses the process of
assigning exposures to a particular
pool of the external provider against
its own process. External data or
statistical models are only used
where a strong link is demonstrated.
5.1.2.1 Inspect underlying data and confirm
whether the bank has used external data or
statistical models in its LGD estimation.
Where external data or statistical
models are used, the external
portfolio is representative of the risk
profile of the current population.
Bank practice and Findings
5.1.2.2 If external data or statistical models are
used, determine whether the bank has
demonstrated that the process of assigning
exposures to pools of the external data
provider shows a strong link to the process
used by the bank.
5.1.2.3 If external data or statistical methods
are used, enquire with management as to
whether the bank has assessed whether the
external portfolio is representative of the
current population. Assess and document the
reasonability of this assessment.
The bank’s LGD estimates are
supported by historical recovery
rates and empirical evidence.
5.1.3.1 Inspect and assess developmental
evidence and confirm that LGD estimates are
based primarily on historical recovery rates
and empirical evidence and not simply
judgmental estimates.
LGD estimates are based on a
sufficiently large sample size to
produce accurate and robust results.
5.1.4.1 Inspect underlying data to confirm
whether the number of exposures in each
model segment is sufficient based on statistical
techniques/industry norms to calculate
accurate and robust estimates, with reference
to documented internal standards.
5.1.4.2 Where not, enquire of management
and document the motivation for and the
effect of any adjustments.
17
Management comments
5.
5.1.5
5.2
5.2.1
5.2.2
Regulation
LGD estimation
periods that will ensure accurate
and robust LGD estimates
13)(b)(v)(C)(xiii) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall in the case of:
(cc) retail exposures be based on a
minimum data observation period
of no less than five years provided
that the bank may with prior
written approval of the Registrar
place more reliance on recent data
when the said data better reflects
loss rates in respect of the bank’s
retail exposures.
Methodology
(13)(d)(i)(A) Unless specifically
otherwise
provided
in
the
subregulation (13), in order to
calculate its risk-weighted credit
exposure, a bank that adopted the
advanced IRB approach – shall (ii) In the case of retail exposures
and purchased retail receivables
calculate its own estimates of PD,
LGD and EAD in respect of each
relevant retail pool of exposure
provided that the bank shall comply
with the relevant minimum
requirements specified in respect of
the said risk components in
subregulations (11)(b) and (11)(d)
above and in this subregulation
(13);
(11)(b)(v)(G)(ii) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods shall be used
appropriately.
Criteria
Attest procedures
The Bank uses a minimum of 5 years
of observed defaults for LGD
estimation.
5.1.5.1 Inspect underlying data to confirm
whether the Bank has used a minimum of 5
years of observed defaults for LGD estimation.
Where the Bank weights more
recent data more heavily than older
data, the weighting decisions are
approved by the Registrar; applied
consistently,
and
rationale
documented.
The bank estimates a LGD ratio in
respect of each retail pool of
exposures, where each retail pool of
exposures refers to each segment
within the model.
The bank has followed a robust
mathematical and statistical process
in developing the LGD model. The
accuracy of the model output is
supported by appropriate statistical
or mathematical processes.
The bank has provided a detailed
outline of the theory, assumptions
and/or mathematical and empirical
basis of the assignment of LGD
estimates to exposures.
Bank practice and Findings
5.1.5.2 Where the Bank weights more recent
data more heavily than older data, inspect the
Registrar’s approval for this.
Inspect
developmental evidence to confirm that the
weighting is applied consistently and the
rationale documented.
5.2.1.1 Determine whether an LGD estimate is
calculated for each model segment.
5.2.2.1. Enquire of management what their
mathematical and statistical methodology
applied
is
and
inspect
supporting
documentation relating to the LGD model to
assess whether this has been documented.
Note any differences between what
management state and the documentation in
the findings.
5.2.2.2. Inspect whether the methodology
applied is based on sound mathematical or
statistical techniques when compared to
industry norms.
18
Management comments
5.
Regulation
LGD estimation
Criteria
Attest procedures
Bank practice and Findings
5.2.2.3 Re-perform the mathematical and
statistical methodology applied by the bank to
develop the LGD model, based on the
documentation provided.
5.2.3
5.2.4
(11)(b)(vi)(B)(x) Unless specifically
otherwise provided, a bank shall in
the case of retail exposures
estimate a PD ratio and a LGD ratio
in respect of each retail pool of
exposures, which PD estimate and
LGD estimate – shall be based on
long-run average estimates of PD
and default-weighted average loss
rates given default, based on an
estimate of the expected long-run
loss rate – provided that –
(aa) the bank may use an
appropriate PD estimate to infer the
long-run default-weighted average
loss rate given default;
Retail IRB: Banks consistently use 1
of 3 methods:
1) Calculate PD and LGD
2) Calculate EL and PD to
infer LGD
3) Calculate EL and LGD to
infer PD
LGD is the segment's defaultweighted credit-related economic
loss net of discounted recoveries as
a percentage of the EAD. [This
report reflects the procedures for a
workout LGD.
The procedures
should be amended if an indirect
LGD technique is used.]
(bb) the bank may use a long-run
default-weighted average loss rate
given default to infer the
appropriate PD;
5.2.5
5.2.6
(cc) the LGD ratio used to calculate
the bank’s IRB capital requirement
shall not be less than the long-run
default-weighted average loss rate
given default;
Direct costs: Direct costs relating to
recovery (e.g. legal fees) are
included in the LGD estimate.
Indirect costs:
Recovery costs
include the costs of running the
Bank's collection and workout
departments and the cost of
outsourced collection services.
Recovery costs also include an
appropriate percentage of other
ongoing costs, such as corporate
overhead. Where costs cannot be
allocated
because
of
data
constraints, the Bank can assign
costs using broad averages.
5.2.3.1 Refer to 4.2.2 in PD section.
5.2.4.1 Determine whether the method used
to determine the LGD estimate reflects the
segment's default-weighted credit-related
economic loss net of discounted recoveries as
a percentage of the EAD
5.2.4.2 If the LGD is not calculated as the
segment’s default-weighted credit-related
economic loss net of discounted recoveries as
a percentage of the EAD, the bank should
motivate the approach used and determine
the impact on the LGD estimate of using the
alternative approach..
5.2.4.3 Re-perform the LGD calculation for a
sample of exposures to determine if the
documented methodology has been correctly
applied.
5.2.5.1 Inspect that the developmental
evidence addresses the treatment of direct
costs directly, and that they are included in the
LGD estimate. Enquire of management and
document management’s motivation for the
method used to include direct costs in the
model.
5.2.6.1 Inspect that the developmental
evidence addresses the treatment of indirect
costs directly, and that they are included in the
LGD estimate. Enquire and document
management’s motivation for the method
used to determine the level of indirect costs
included in the model.
5.2.6.2
Enquire whether
management
considers the source of the data used to
calculate indirect costs is appropriate, and
document management’s justification. Agree
the data used in the calculation to the source
data.
19
Management comments
5.
5.2.7
Regulation
LGD estimation
Criteria
Discount rate – Discounted CF model
only: The discount rate should
reflect the time value of money and
the opportunity cost of funds, and
should include a risk premium where
recovery streams are uncertain. The
discount rate should reflect the
distressed nature of the asset if the
value of the asset is not directly or
indirectly used as a risk driver in the
model. To calculate LGDs consistent
with economic downturn conditions,
risk premia should reflect
uncertainties in recovery cash flows
associated with defaults that arise
during an economic downturn.
Attest procedures
Bank practice and Findings
5.2.7.1 Review the developmental evidence to
determine the Bank’s treatment of the
discount rate in the LGD estimate.
5.2.7.2 Enquire and document management’s
motivation for the discount rate used in the
model and compare to the risk-free rate plus
an appropriate risk premium. Where certaintyequivalent cash flows are used in LGD
modelling, the risk-free rate may be used for
discounting.
5.2.7.3 Quantify the impact on the LGD
estimate of using an industry standard
alternative discount rate should management’s
justification for the discount rate used be
determined not to be appropriate.
Where there is no uncertainty in
recovery
streams
(e.g.
cash
collateral), a risk-free discount rate
is appropriate.
In other cases, the discount rate
should be equal to the risk free rate
plus an appropriate risk premium.
5.2.8
Workout period:
The Bank
documents its choice of workout
period.
Treatment
of
post-write
off
recoveries is documented in model
methodology and is aligned to
Bank’s policy.
Where post write-off recoveries are
significant, the Bank has satisfied
itself that its write-off policy is
appropriate.
The workout data used to determine
the LGD estimate should be
consistent with respect to the writeoff policy applied.
5.2.8.1 Obtain an understanding of the extent
of post-write off recoveries. Inspect supporting
evidence to confirm whether the treatment of
these is documented in model methodology
and aligns with Bank’s policy.
5.2.8.2 Enquire of management as to whether
they have considered if the extent of postwrite off recoveries is so significant that a
change to the write-off policy is required.
5.2.8.3 Enquire of management as to whether
an analysis has been performed to determine
whether any changes in the Bank’s write-off
policy will have a significant impact on LGD
estimates.
5.2.8.4 Where the write-off policy has
changed, enquire of management whether
historical recovery data should be amended to
ensure consistency with the current write-off
policy. Document their conclusion.
5.2.8.5 ..Determine through inspection of the
model documentation whether management
has performed an analysis to motivate the
appropriateness of the workout period used in
the LGD model.
5.2.9
Incomplete workouts: The Bank
incorporates results of incomplete
5.2.9.1 Inspect the developmental evidence to
confirm whether the Bank’s has documented
20
Management comments
5.
Regulation
LGD estimation
5.2.10
5.2.11
5.2.12
5.2.13
5.2.14
13)(b)(v)(C)(xiii)(aa)
Unless
specifically otherwise provided in
subregulation 13, a bank that
adopted the advanced IRB approach
for the measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio –
shall in the case of defaulted assets
reflect the possibility that the bank
may have to recognise additional,
unexpected losses during the
recovery period;
(13)(b)(v)(C)(v) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall appropriately incorporate any
potential correlation or dependence
between the risk relating to the
borrower and the collateral,
collateral provider or protection
provider.
(13)(b)(v)(C)(vi) Unless specifically
Criteria
Attest procedures
workouts into their LGD estimates,
unless it demonstrates that the
incomplete workouts are not
relevant. Where the Bank closes the
observation period of defaulted
loans before final resolution occurs,
it estimates expected costs and
recoveries after this point. The Bank
documents its choice of period of
observation, and how it estimated
additional costs and recoveries
beyond this period.
an approach to incomplete workouts.
5.2.9.2 Enquire of management’s their
motivation for the treatment of incomplete
work-outs in the model and document their
answer.
Post-default drawings: Further
drawings post default should be
taken into account as part of LGD.
5.2.9.3 Where incomplete workouts are
significant and management’s justification for
the
treatment
applied,
assess
the
appropriateness of management’s treatment.
Where inappropriate, quantify the impact on
the LGD estimate.
5.2.10.1 Inspect the developmental evidence
for evidence of the bank’s approach to postdefault drawings.
Observation weighting: LGD must
not be lower than the defaultweighted average of individual
exposure-level LGDs.
5.2.10.2 Confirm whether post-default
drawings are included in the LGD.
5.2.11.1 Re-calculate the LGD calculation to
confirm that the result obtained is not lower
than the default-weighted average of
individual exposure-level LGDs.
When applying LGD estimates to
defaulted assets, the LGD reflects
the possibility that the bank may
have to recognise additional,
unexpected losses during the
recovery period.
The LGD appropriately incorporates
any
potential
correlation
or
dependence between the risk
relating to the borrower and the
collateral, collateral provider or
protection provider.
Bank practice and Findings
5.2.11.2 Where the result is lower, re-calculate
management’s quantification of the impact on
the LGD estimate.
5.2.12.1 Determine whether defaulted assets’
LGDs reflect the possibility that the bank may
have to recognise additional, unexpected
losses during the recovery period through
comparison with BEEL.
5.2.13.1 If applicable to the portfolio rated by
the model, confirm with management that the
bank has a documented process to identify
correlated / dependent collateral / collateral
provider / protection provider types.
5.2.13.2 For collateralised exposures, recalculate whether correlations identified as per
the documented process have been
incorporated into the model.
The bank incorporates the effect of
5.2.13.3 Where no allowance for correlations
has been made, enquire of management their
justification for this. Assess and document the
reasonability of their conclusion.
5.2.14.1 If applicable to the portfolio rated by
21
Management comments
Regulation
LGD estimation
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall incorporate the effect of a
currency mismatch between the
underlying obligation and the
collateral obtained.
(11)(b)(v)(G)(vi) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods shall not contain any
known material biases.
Criteria
Attest procedures
currency
mismatches
when
estimating an LGD relating to
collateral denominated in a different
currency to the underlying.
the model, for collateralised exposures, inspect
underlying data to confirm whether currency
mismatches between the underlying obligation
and the collateral held have been incorporated
into the model.
The method used to estimate LGD
ratios shall not contain any known
material biases.
5.2.15.1 Inspect supporting documentation
describing the methodology used to estimate
LGD estimates and document any known
material biases identified therein.
5.2.16
Refer to Regulation (39)(7)
The final model has been approved
by the Board or its designated subcommittee.
5.3
5.3.1
Parameter Estimation
5.
5.2.15
(13)(b)(v)(C)(viii) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be based on a population of
exposures that closely match or is
at least comparable to the Bank’s
existing exposures and lending
standards.
5.3.2
(13)(b)(v)(C)(i) Unless specifically
Zero and negative LGDs are treated
appropriately when calculating LGD
estimates and do not introduce bias
into the model.
Bank practice and Findings
5.2.15.2 Inspect the data set used to calculated
LGD estimates to identify negative and zero
LGDs.
5.2.15.3 Assess management motivation for
the treatment of negative and zero LGDs in
LGD estimation. Document their conclusion.
The data set used for development
or for the latest model update is
representative of existing exposures
and lending standards.
5.2.15.4 Where zero and negative LGDs are
significant and are included in LGD estimation,
re-calculate management’s quantification of
the impact of this on the LGD estimates
calculated.
5.2.16.1 Inspect supporting documentation
and evidence that final model has been
approved by the Board or its designated subcommittee.
5.3.1.1 Inspect the developmental evidence to
confirm the development data set or the data
set used for the latest model update is
representative of the bank’s existing exposures
and lending standards.
5.3.1.2 Where the data set is not
representative of current exposures and
lending standards, inspect the bank’s
evaluation of whether any differences are
significant to result in bias.
Model inputs and development
5.3.2.1 Assess the adequacy of the process for
22
Management comments
5.
5.3.3
5.3.4
5.3.5
Regulation
LGD estimation
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall incorporate all relevant and
material data and information,
including conditions relating to an
economic downturn when such
information is necessary to duly
capture the relevant risk
(13)(b)(v)(C)(ix) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be based on economic and
market conditions that are relevant
and current.
(13)(b)(v)(C)(xii) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be reviewed on a regular basis
but not less frequently than once a
year or when material new
information is obtained.
(11)(b)(v)(D)(ii) The rating system
shall be sufficiently robust to ensure
that the bank assigns each retail
exposure to a relevant pool of retail
exposures to make provision for(aa) a meaningful differentiation of
risk, that is, there shall be a
meaningful
distribution
of
borrowers and exposures across the
relevant retail pools of exposure in
order to ensure that no single pool
of exposures results in undue
concentration in relation to the
bank’s total retail exposure;
(bb) a grouping of sufficiently
homogenous exposures provided
that the bank shall consider the risk
drivers in respect of borrower risk,
Criteria
Attest procedures
data are reviewed by management
to ensure that all relevant and
material data and information is
incorporated.
the review and signoff of the model inputs and
development data.
The LGD estimate is based on
economic and market conditions
that are relevant and current.
5.3.3.1 Enquire of management as to whether
they have used the most recent appropriate
data available is used in LGD estimation.
Document the basis for their conclusion.
Bank practice and Findings
5.3.2.2 Review the basis for any adjustments
and assess reasonableness.
5.3.3.2 Where not, assess and document
management’s motivation.
The Bank reviews LGD estimates at
least annually or when material new
information is obtained.
The bank has a meaningful
distribution of exposures across LGD
model segments; the bank does not
have excessive concentrations of
exposures in any one LGD model
segment.
LGD pools are based on sufficiently
homogeneous exposures. The bank
considers risk drivers in respect of
borrower risk, transaction risk and
delinquency status in assigning
exposures to LGD model segments.
5.3.4.1 Inspect supporting documentation to
confirm that the bank has a documented
process for identifying new information that
would affect LGD estimates. Document
management’s criteria.
5.3.4.2 Inspect supporting documentation to
confirm that the Bank reviews LGD estimates
annually or when new information meeting
management specified criteria is obtained. This
refers to the application of updated estimates
to exposures rather than to updating of the
LGD model.
5.3.5.1 Inspect supporting documentation to
confirm whether the bank has assessed the
distribution of exposures across LGD model
segments.
5.3.5.2 Document management’s motivation
for any concentrations observed.
5.3.5.3 Inspect supporting documentation to
confirm whether LGD model segments are
based on homogeneous exposures and
whether the relevant risk drivers are
considered in the assignment of exposures to
LGD model segments.
23
Management comments
5.
5.4
5.4.1
5.5
5.5.1
Regulation
LGD estimation
transaction risk and the delinquency
status of retail exposures when the
bank assigns a particular exposure
to a particular retail pool of
exposures;
Accuracy of estimates
(13)(b)(vi)(B) As a minimum, a Bank
that adopted the advanced IRB
approach for the measurement of
the Bank’s exposure to credit riskshall for each relevant risk grade
regularly compare realised LGD
ratios with estimated LGD ratios
and demonstrate to the satisfaction
of the Registrar that the realised
risk components are within the
expected range of risk components
for a particular grade
(13)(b)(v)(C)(xi) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk - shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall be based on an estimation
technique that performs well in outof-sample tests.
Downturn LGD
(13)(b)(v)(C)(ii) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall not be less than the long-run
default weighted average loss rate
given default, based on the average
economic loss of all observed
defaults within the data source for a
particular type of facility, which
default-weighted average loss rate
given default shall be calculated in
accordance with the formula
specified
below:
Criteria
Backtesting:
The bank has a
documented backtesting program in
place.
The Bank performs comparison of
actual historical LGDs against modelpredicted LGDs in accordance with
the
documented
backtesting
program.
Internal
actual
v
expected
thresholds are established in the
backtesting program.
The bank compares its estimate of
LGD with the long run default
weighted average LGD; the LGD
estimate is not less than the long
run average;
The long-run default-weighted
average LGD is calculated using the
formula specified in the regulations,
being:
Attest procedures
Bank practice and Findings
5.4.1.1 Backtesting:
Inspect supporting
documentation to confirm whether the bank
has performed LGD backtesting in accordance
with a documented backtesting program and
industry norms.
5.4.1.2 Determine whether results have been
assessed using documented internal guidelines
as per the bank’s backtesting program and
industry norms.
5.4.1.3 Where deviations are not acceptable
with reference to internal guidelines and
industry norms for assessment of results,
confirm that management has justified the
deviations observed or specified actions to
address the deviations.
5.5.1.1 Compare the LGD estimate used to
calculate capital with the long run defaultweighted average LGD and ensure that the
LGD estimate used is not less than the defaultweighted long run average, calculated using
the formula specified in the regulations.
LGD (%) = (1/n) Σ(Economic
lossi/Amount at defaulti)
LGD (%) = (1/n) Σ(Economic
lossi/Amount at defaulti)
24
Management comments
5.
5.5.2
Regulation
LGD estimation
(13)(b)(v)(C)(iv) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
may be based on averages of loss
severities observed during periods
of high credit losses, obtained from
internal and / or external data,
provided that the data shall be
representative
of
long
run
experience.
(13)(b)(v)(C)(i) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate LGD ratio
in respect of all relevant facilities
and asset classes, which LGD ratio
shall incorporate conditions relating
to economic downturn when such
information is necessary to duly
capture the relevant risk.
Criteria
The bank has a rigorous and welldocumented process for assessing
the effects, if any, of economic
downturn conditions on recovery
rates and for producing LGD
estimates consistent with downturn
conditions.
The bank identifies appropriate
downturn conditions for each
supervisory asset class within each
jurisdiction. The bank may identify
downturn conditions at a more
granular level if such an approach is
more risk sensitive. The bank
identifies adverse dependencies, if
any, between default rates and
recovery rates. A bank incorporates
adverse dependencies, if identified,
between default rates and recovery
rates so as to produce LGD
parameters
consistent
with
downturn conditions.
Attest procedures
Bank practice and Findings
5.5.2.1 Inspect the developmental evidence to
confirm that it contains the bank’s process for
assessing the effects of downturn conditions
on recovery rates and for calculating the
downturn LGD.
5.5.2.2 Inspect supporting evidence to confirm
whether the Bank has considered both internal
and/or external empirical evidence when
determining the downturn period.
5.5.2.3 Inspect the Bank’s process for
determining whether there are adverse
dependencies between default rates and
recovery rates and compare this process to
accepted industry norms.
5.5.2.4 Inspect supporting
documentation/underlying data to confirm
whether any adverse dependencies identified
by the bank are appropriately reflected in the
LGD used for capital calculation.
25
Management comments
Regulation
6
EAD Estimation
Model overview:
6.1
6.1.1
6.1.2
6.1.3
6.1.4
Criteria
Attest procedures
The Bank’s EAD estimates are
supported
by
historical
experience
and
empirical
evidence
6.1.1.1 Inspect developmental evidence to
confirm that EAD estimates are based primarily
on historical data and empirical evidence and
not simply judgmental estimates.
Externally sourced data may be used
in the modeling of EAD provided
that the EAD estimates represent
long-run experience.
6.1.2.1. Inspect the developmental evidence in
order to confirm whether externally sourced
data was used in the modeling of EAD. Where
this is the case, enquire of management as to
whether the use of the data is justified. Inspect
supporting evidence and confirm that the EAD
estimates represent long-run experience.
EAD estimates are based on a
sufficiently large sample size to
produce accurate and robust
results.
6.1.3.1 Re-calculate whether the number of
exposures in each pool is sufficient to calculate
accurate and robust estimates, with reference
to documented internal standards.
Bank practice and Findings
Data
[(13)(b)(v)(D) Unless specifically
otherwise provided in subregulation 13, a bank that
adopted the advanced IRB
approach for the measurement
of the bank’s exposure to credit
risk shall estimate an appropriate
EAD amount in respect of all
relevant facilities and asset
classes].
(xiii) The EAD ratio shall be
based on historical data and
empirical evidence.
[(13)(b)(v)(D) Unless specifically
otherwise provided in subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes.]
(xii) The EAD estimate may take into
account data from external sources,
including pooled data, provided
that the EAD estimates shall
represent long-run experience.
[(13)(b)(v)(D) Unless specifically
otherwise provided in subregulation 13, a bank that
adopted the advanced IRB
approach for the measurement
of the bank’s exposure to credit
risk shall estimate an appropriate
EAD amount in respect of all
relevant facilities and asset
classes].
(x) The EAD estimate shall be
based on a sufficient number of
exposures and data periods that
will ensure accurate and robust
estimates of EAD amounts.
[(13)(b)(v)(D) Unless specifically
otherwise provided in subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
6.1.3.2 Where not, assess the reasonableness
and quantify the effect of any adjustments.
The Bank uses a minimum of 5 years
of observed defaults for EAD
estimation.
Where the Bank weights more
recent data more heavily than older
data, the weighting decisions are
approved by the Registrar; applied
6.1.4.1 Inspect supporting documentation to
confirm that the Bank has used a minimum of
5 years of observed defaults for EAD
estimation.
6.1.4.2 Where the Bank weights more recent
data more heavily than older data, inspect the
26
Management comments
6.2
6.2.1
Regulation
facilities and asset classes.]
(i)(ee) The EAD estimate shall, in the
case of retail exposures, be based
on a data observation period of no
less than five years provided that
the bank may with the prior written
approval of the Registrar place
more reliance on recent data when
the said data better reflect likely
draw-downs in respect of the
bank’s retail exposures;
Methodology
Criteria
consistently,
documented.
[(13)(d)(i) Unless specifically
otherwise provided in the
subregulation (13), in order to
calculate its risk-weighted credit
exposure, a bank that adopted the
advanced IRB approach shall - ]
The bank estimates an EAD ratio in
respect of each retail pool of
exposures, where each retail pool of
exposures refers to each segment
within the model.
6.2.1.1 Determine whether an EAD estimate is
calculated for each model segment.
The bank has followed a robust
mathematical and statistical process
in developing the EAD model. The
accuracy of the model output is
supported by appropriate statistical
or mathematical processes.
6.2.2.1. Enquire of management what their
mathematical and statistical methodology
applied
is
and
inspect
supporting
documentation relating to the EAD model to
assess whether this has been documented.
Note any differences between what
management state and the documentation in
the findings.
and
rationale
Attest procedures
Registrar’s approval for this. Inspect
developmental evidence to confirm that the
weighting is applied consistently with the
rationale documented in the supporting
documentation
Bank practice and Findings
(A)(ii) In the case of retail exposures
and purchased retail receivables
calculate its own estimates of PD,
LGD and EAD in respect of each
relevant retail pool of exposure
provided that the bank shall comply
with the relevant minimum
requirements specified in respect of
the said risk components in
subregulations (11)(b) and (11)(d)
above and in this subregulation
(13);
6.2.2
6.2.3
(11)(b)(v)(G)(ii) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods shall be used
appropriately.
[(13)(b)(v)(D) Unless specifically
otherwise provided in subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes]
The bank has provided a detailed
outline of the theory, assumptions
and/or mathematical and empirical
basis of the assignment of EAD
estimates to exposures.
EAD estimates shall be based on a
long-run default-weighted average
EAD amount in respect of similar
facilities and borrowers over a
sufficiently long period of time
6.2.2.2. Inspect whether the methodology
applied is based on sound mathematical or
statistical techniques when compared to
industry norms.
6.2.3.1 Inspect underlying data to confirm
whether the method used to determine the
EAD estimate reflects the long-run defaultweighted average EAD amount in respect of
similar facilities and borrowers over a
sufficiently long period of time.
6.2.3.2 Re-perform the EAD calculation for a
sample of exposures to determine if the
documented methodology has been correctly
27
Management comments
Regulation
(ii) Shall be an estimate of long-run
default-weighted average EAD
amount in respect of similar
facilities and borrowers over a
sufficiently long period of time
Criteria
Attest procedures
applied.
In respect of all on-balance sheet
exposures, the EAD amount applied
is a minimum of the current
outstanding balance.
6.2.4.1 Inspect the EAD amounts on a sample
of exposures and confirm that the EAD amount
applied is greater than or equal to the drawn
balance.
EAD estimates incorporate the
possibility that further amounts may
be drawn by the obligor up to and
after the time of default.
6.2.5.1 Inspect the Bank’s developmental
evidence to confirm that it identifies an
approach to modeling EAD. Inspect that this
approach allows for draw down up to the point
of default.
The method used to estimate EAD
ratios shall not contain any known
material biases.
6.2.6.1 Inspect supporting documentation
describing the methodology used to estimate
EAD amounts and document any known
material biases identified therein.
6.2.7
(13)(b)(v)(D) Unless specifically
otherwise provided in subregulation
13, a bank that adopted the
advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes.]
(i)(aa) The EAD amount shall, in the
case of on-balance sheet exposures,
be no less than the current drawn
amount after the effect of set-off in
terms of the provisions of
regulation 13 has been taken into
consideration.
(i) The EAD amount shall, in the
case of:
(aa) on-balance sheet exposures,
excluding derivative instruments, be
based on the Bank’s internal
estimates for each pool, provided
the said estimates shall incorporate
the possibility that further amounts
may be drawn by the obligor up to
and after the time of default.
(bb) off-balance sheet exposures,
excluding derivative instruments, be
based on the Bank’s internal
estimates for each facility type,
provided the said internal estimates
shall incorporate the possibility that
further amounts may be drawn by
the obligor up to and after the time
of default.
(11)(b)(v)(G)(vi) The rating and risk
estimation systems and processes
of a bank that adopted the IRB
approach for the measurement of
the bank’s exposure to credit risk
may include statistical models and
mechanical methods to assign
borrower and facility ratings or
estimate PD ratios, LGD ratios and
EAD amounts, which models and
methods shall not contain any
known material biases.
Refer to Regulation (39)(7)
The final model has been approved
by the Board or its designated subcommittee.
6.2.7.1 Inspect supporting documentation that
final model has been approved by the Board or
its designated sub-committee.
6.3
Parameter Estimation
6.2.4
6.2.5
6.2.6
Bank practice and Findings
28
Management comments
6.3.1
6.3.2
6.3.3
6.3.4
Regulation
[(13)(b)(v)(D) Unless specifically
otherwise provided in subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes]
(viii) which EAD amount – shall be
based on a population of exposures
that closely matches or is at least
comparable to the bank’s existing
exposures and lending standards.
Criteria
The data set used for development
or for the latest model update is
representative of existing exposures
and lending standards.
[(13)(b)(v)(D) Unless specifically
otherwise provided in subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes]
(vi) which EAD amount shall
appropriately take into
consideration all relevant and
material information.
[(13)(b)(v)(D) Unless specifically
otherwise provided in subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes]
(xiv) The EAD estimate shall be
reviewed on a regular basis but not
less frequently than once a year or
when material new information is
obtained.
Model inputs and development data
are reviewed by management to
ensure that all relevant and material
data and information is
incorporated.
(11)(b)(v)(D)(ii) The rating system
shall be sufficiently robust to ensure
that the bank assigns each retail
exposure to a relevant pool of retail
exposures to make provision for(aa) a meaningful differentiation of
risk, that is, there shall be a
meaningful
distribution
of
borrowers and exposures across the
relevant retail pools of exposure in
order to ensure that no single pool
of exposures results in undue
concentration in relation to the
The bank has a meaningful
distribution of exposures across EAD
model segments; the bank does not
have excessive concentrations of
exposures in any one EAD model
segment.
6.3.4.1 Inspect supporting documentation to
confirm whether the bank has assessed the
distribution of exposures across EAD model
segments.
EAD pools are based on sufficiently
homogeneous exposures. The bank
considers risk drivers in respect of
borrower risk, transaction risk and
delinquency status in assigning
6.3.4.3 Determine whether EAD model
segments are based on homogeneous
exposures, and whether the relevant risk
drivers are considered in the assignment of
exposures to EAD model segments.
The Bank reviews EAD estimates at
least annually or when material new
information is obtained.
Attest procedures
Tests of the representativeness of
development/model update data set:
Bank practice and Findings
the
6.3.1.1 Inspect the developmental evidence to
confirm that the development data set or the
data set used for the latest model update is,
based
on
management’s
assessment,
representative of the bank’s existing exposures
and lending standards.
6.3.1.2 Where the data set is not
representative of current exposures and
lending standards, inspect the bank’s
evaluation of whether any differences are
significant to result in bias. Assess the
reasonability of and document management’s
conclusion.
6.3.2.1 Document the process followed by
management for the review and signoff of the
model inputs and development data.
6.3.2.2 Inspect the basis for any adjustments
and assess the reasonability of adjustments
made.
6.3.3.1 Inspect supporting documentation to
confirm that the bank has a documented
process for identifying new information
meeting management specified criteria that
would affect EAD estimates. Document
management’s criteria.
6.3.3.2 Inspect supporting documentation to
confirm that the Bank updates the application
of EAD estimates at least annually or when
new information meeting management
specified criteria is obtained. This refers to
application rather than recalibration of the
model.
6.3.4.2 Document management’s motivation
for any concentrations observed.
29
Management comments
6.4
6.4.1
Regulation
bank’s total retail exposure;
(bb) a grouping of sufficiently
homogenous exposures provided
that the bank shall consider the risk
drivers in respect of borrower risk,
transaction risk and the delinquency
status of retail exposures when the
bank assigns a particular exposure
to a particular retail pool of
exposures;
Accuracy of estimates
(13)(b)(vi) (B) As a minimum, a
Bank that adopted the advanced
IRB approach for the
measurement of the Bank’s
exposure to credit risk-shall for
each relevant risk grade
regularly compare realised PD
ratios, LGD ratios and EAD
amounts with estimated PD
ratios, LGD ratios and EAD
amounts and demonstrate to the
satisfaction of the Registrar that
the realised risk components are
within the expected range of risk
components for a particular
grade.
Criteria
exposures to EAD model segments.
Backtesting:
The bank has a
documented backtesting program in
place.
The Bank performs comparison of
actual historical EADs against modelpredicted EADs in accordance with
the
documented
backtesting
program.
Internal
actual
v
expected
thresholds are established in the
backtesting program.
Attest procedures
Bank practice and Findings
6.4.1.1 Backtesting:
Inspect supporting
documentation to confirm whether the bank
has performed EAD backtesting in accordance
with a documented backtesting program.
6.4.1.2 Inspect supporting documentation to
confirm whether results have been assessed
using documented internal guidelines as per
the bank’s backtesting program.
6.4.1.3 Where deviations are not acceptable
with reference to internal guidelines for
assessment of results, confirm that
management has justified the deviations
observed or specified actions to address the
deviations.
[(13)(b)(v)(D)(xi) Unless
specifically otherwise provided in
sub-regulation 13, a bank that
adopted the advanced IRB
approach for the measurement
of the bank’s exposure to credit
risk shall estimate an appropriate
EAD amount in respect of all
relevant facilities and asset
classes.]
6.5
6.5.1
The EAD estimate shall be
based
on
an
estimation
technique that performs well in
out-of-sample tests.
Downturn EAD
[(13)(b)(v)(D)Unless specifically
otherwise provided in subregulation 13, a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk shall
estimate an appropriate EAD
amount in respect of all relevant
facilities and asset classes.]
(iii) The EAD amount shall
incorporate any correlation
between the default frequency and
the extent of EAD amounts.
(iv) The EAD shall reflect the effects
of downturns in the economy i.e.
the risk drivers of the Bank’s
internal model or the Bank’s
internal data or external data shall
The effects, if any, of changes in the
cycle (i.e. when default frequencies
change, including under downturn)
on EAD estimates are assessed, and
EAD estimates are produced to
ensure consistency with downturn
conditions.
6.5.1.1 Inspect supporting evidence to confirm
whether the Bank’s EAD model considers
downturn economic conditions
6.5.1.2
Through
inspection
of
the
developmental evidence, confirm that the
bank has performed an analysis of the
correlation between default frequency and the
extent of EAD amounts
6.5.1.3 Confirm through inspection of the
developmental evidence that the EAD model
allows for any correlation identified.
30
Management comments
Regulation
incorporate the cyclical nature of
each facility.
Criteria
Attest procedures
Bank practice and Findings
31
Management comments
7
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
7.1
On-balance sheet netting
(14)(a) When a bank that adopted
the advanced IRB approach for the
measurement of the bank’s
exposure to credit risk in respect of
positions held in the bank’s banking
book enters into a netting
agreement in respect of loans and
deposits, the bank may recognise
the effect of such a netting
agreement
when
the
bank
calculates the EAD amount of the
relevant exposure provided that the
bank(i) shall at all times comply with the
relevant conditions specified in
subregulation
(7)(a)
above;
(ii) shall recognise the effect of any
currency mismatch in accordance
with the relevant requirements
specified in subregulation (9)(b)
above;
(iii) shall recognise the effect of a
maturity mismatch in accordance
with the relevant requirements
specified in subregulation (9)(e)
above.
7.2
Attest procedures
Where the bank enters into a
netting agreement in respect of
loans and deposits maintained with
the bank by a client, the bank
complies with the following
conditions:
The bank shall:
• have a well-founded legal basis
for concluding that the netting
or offsetting agreement is
enforceable in each relevant
jurisdiction, regardless whether
the counterparty is insolvent or
bankrupt;
• be able to determine the loans
and deposits with the same
counterparty that are subject to
the netting agreement;
• monitor and control any
potential roll-off risk in respect
of the said debit and credit
balances;
• monitor and control the
relevant exposures on a net
basis
The bank treats the exposures
subject to the netting agreement as
collateralised transactions and
calculates an adjusted exposure
according to the formula per 10.4.1
below. (using the formula applicable
to transaction type 1)
7.1.1 For a sample of net exposures (i.e. where
the bank has netted a client’s deposits with the
same client’s loans):
The bank's credit policy specifies the
minimum
requirements
for
collateral per subregulation (7)(b)(iii)
as well as the procedures to be
followed in order to achieve
compliance with these minimum
requirements.
7.2.1.1. Inspect the bank's credit policy for the
appropriate inclusion of the minimum
requirements and related procedures for
collateral in line with subregulation (7)(b)(iii)
•
Bank practice and Findings
Determine whether there is a netting
agreement in respect of the client’s
loans and deposits.
Inspect the netting agreement in order to
determine whether the bank has complied
with the adjacent conditions
Collateral
14)(b)(i) Unless specifically provided
otherwise in this subregulation (14),
a bank that adopted the AIRB
approach for the measurement of
the bank's exposure to credit risk
shall in addition to the minimum
requirements specified below,
comply
with
the
relevant
requirements
specified
in
subregulation (7)(b)(iii)
7.2.2.2 For a sample of exposures for secured
by
collateral:
• inspect relevant supporting documentation
to determine whether the bank has complied
with
the
requirements
specified
in
subregulation (7)(b)(iii)
Minimum requirements per
subregulation (7)(b)(iii)
General requirements:
A reduction in the risk exposure of a
bank shall be allowed to the extent32
Management comments
7
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
7.2.1.
(i) that such collateral was not
already taken into account in the
calculation of the reporting bank’s
risk exposure. For example, no
reduction in the risk exposure of the
reporting bank shall be allowed in
respect of an exposure for which an
issue specific rating was issued,
which rating already reflects the
effect of the risk mitigation;
7.2.2.
(ii) that the bank complies with the
relevant requirements relating to
disclosure, prescribed in regulation
43
Attest procedures
Bank practice and Findings
The relevant requirements of
paragraph 43 have been set out
below:
43 (2)(e)(i)(D)(i)(bb) the bank’s
policies and processes relating to
the valuation and management of
collateral, including a description of
the main types of collateral
accepted by the bank;
(2)(e)(i)(D)(ii)(aa) eligible financial
collateral, after the effect of any
haircuts has been taken into
consideration;
(2)(e)(i)(D)(ii)(bb) other eligible IRB
collateral, that is, collateral that
qualifies as eligible collateral in
terms of the IRB approach in
addition to eligible financial
collateral, after the effect of any
haircuts or adjustments to the
exposure has been taken into
consideration;
(2)(e)(i)(E)(i)(bb) the bank’s policies
in order to secure collateral and to
establish adequate credit reserves;
(2)(e)(i)(E)(i)(dd) the estimated
amount of collateral the bank would
have to provide in the case of a
credit rating downgrade.
7.2.3
(iii) that the bank is able to establish
title to the collateral in order to
liquidate it;
Review of statutory audit working papers.
33
Management comments
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
Attest procedures
7.2.4
(iv) that such collateral can be
realised by the reporting bank
under normal market conditions,
that is, the value at which the
collateral can be realised in the
market does not materially differ
from its book value, provided that a
bank shall maintain an appropriate
margin of collateral in excess of the
amount in respect of which a
reduction in the risk exposure is
allowed in order to provide for
fluctuations in the market value of
the relevant collateral.
Review of statutory audit working papers.
7.2.5
Specific requirements
Review of statutory audit working papers.
7
Bank practice and Findings
(i) Legal certainty
Collateral is effective only when the
legal process by which collateral is
given is robust and ensures that the
reporting bank has clear rights over
the collateral, and may liquidate or
retain it in the event of a default,
insolvency or bankruptcy (or an
otherwise defined credit event set
out in the transaction
documentation) of the obligor and,
where applicable, the custodian
holding the collateral.
A bank shall take all steps necessary
to fulfill contractual requirements in
respect of the enforceability of
security interest, for example, by
registering a security interest with
an issuer or a registrar. When the
collateral is held by a custodian, the
bank shall seek to ensure that the
custodian ensures adequate
segregation of the collateral
instruments and the custodian's
own assets.
In cases of uncertainty, a bank shall
obtain legal certainty by way of
legal opinions confirming the
enforceability of the collateral
arrangements in all relevant
jurisdictions, and that the bank’s
rights are legally well founded.
34
Management comments
7
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
Attest procedures
Bank practice and Findings
Legal opinions shall be updated at
appropriate intervals in order to
ensure continued enforceability.
7.2.6
(ii) Documentation
The collateral arrangements shall be
duly documented with a clear and
robust procedure in place for the
timely liquidation of collateral. A
bank's procedures shall be
sufficiently robust to ensure that
any legal conditions required for
declaring the default of the client
and liquidating the collateral are
observed.
7.2.7
(iii) Low correlation with exposure
In order for collateral to provide
effective protection, the credit
quality of the obligor and the value
of the collateral shall not have a
material positive correlation.
7.2.8
Review credit policy and inspect statutory
audit workpapers to assess the adequacy of
documentation surrounding the timely
liquidation of collateral as well as any relevant
legal conditions.
Review the credit risk policy, as well as the risk
management policy to identify the risk
management processes and methodologies
applied.
(vi) Robust risk-management
process
While collateral reduces credit risk;
it simultaneously increases other
risks to which a bank is exposed,
such as legal risk, operational risk,
liquidity risk and market risk.
Therefore, a bank shall employ
robust procedures and processes to
control all material risks.
As a minimum, a robust riskmanagement process relating to
collateral management shall include
the fundamental elements specified
below.
(aa) Strategy
A duly articulated strategy for the
use of collateral shall form an
intrinsic part of a bank's general
credit strategy and overall liquidity
strategy.
(bb) Focus on underlying credit
A bank shall continue to assess a
35
Management comments
7
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
Attest procedures
Bank practice and Findings
collateralised exposure on the basis
of the borrower's creditworthiness.
A bank shall obtain and analyse
sufficient financial information to
determine the obligor's risk profile
and its risk-management and
operational capabilities.
(cc) Valuation
A bank shall mark its collateral to
market and revalue its collateral at
regular intervals but not less
frequently than once every six
months.
(dd) Policies and procedures
Clear policies and procedures shall
be established and maintained in
respect of collateral management,
including:
(i) the terms of collateral
agreements, types of collateral and
enforcement of collateral terms (for
example, waivers of posting
deadlines);
(ii) the management of legal risks;
(iii) the administration of
agreements; and
(iv) the prompt resolution of
disputes, such as valuation of
collateral or positions, acceptability
of collateral, fulfillment of legal
obligations and the interpretation
of contract terms.
A bank shall regularly review its
policies and procedures in order to
ensure that the said policies and
procedures remain appropriate and
effective.
(ee) Systems
A bank's policies and procedures
shall be supported by collateral
management systems capable of
36
Management comments
7
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
Attest procedures
Bank practice and Findings
tracking the location and status of
posted collateral.
(ff) Concentration risk
A bank shall have in place a duly
defined policy with respect to the
amount of concentration risk that it
is prepared to accept, that is, a
policy in respect of the taking as
collateral of large quantities of
instruments issued by the same
obligor.
A bank shall take into account
collateral and purchased credit
protection when it assesses the
potential concentrations in its credit
portfolio, including when
determining its concentration risk in
terms of section 73 of the Act.
7.3
7.3.1
Guarantees
(14)(c)(i) As a minimum, a bank that
adopted the advanced IRB approach
for the recognition of risk mitigation
in
respect
of
guarantees(A) shall continuously comply with
the relevant requirements specified
in subregulation (7)(c)(iv), (11)(b)(v)
and (11)(b)(vi)
The bank's credit policy specifies the
minimum requirements for
guarantees per subregulation
(7)(c)(iv) as well as the procedures
to be followed in order to achieve
compliance with these minimum
requirements.
The requirements per subregulation
(7)(c)(iv) are listed in the Regulation
column below (see grouped rows)
7.3.2
(iv)
Minimum
relating
to
requirements
guarantees
(A)
requirements
General
7.3.1.1. Inspect the bank's credit policy to
determine whether the procedures to ensure
compliance with the requirements specified in
subregulation (7)(c)(iv) have been specified.
7.3.1.2. For a sample of guaranteed exposures,
inspect relevant supporting documentation to
assess whether the requirements per
subregulation (7)(c)(iv) have been complied
with.
A reduction in the risk weight of a
bank's exposure to the risk weight
applicable to the relevant guarantor
shall be allowed only to the extent37
Management comments
7
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
Attest procedures
Bank practice and Findings
(i) that such guarantee was not
already taken into account in the
calculation of the reporting bank’s
risk exposure. For example, no
reduction in the risk exposure of the
reporting bank shall be allowed in
respect of an exposure for which an
issue specific rating was issued,
which rating already reflects the
effect
of
the
guarantee;
(ii) that such guarantee may be
realised by the reporting bank
under normal market conditions;
7.3.3
(B)
Specific
requirements
(i) The guarantee shall be an
explicitly documented obligation
assumed by the guarantor.
7.3.4
(ii) The guarantee shall be legally
enforceable
in
all
relevant
jurisdictions and the bank’s rights in
terms of the guarantee shall be
legally
well
founded.
Legal opinions shall be updated at
appropriate intervals in order to
ensure continued enforceability of
the bank’s rights in terms of the
guarantee.
7.3.5
(iii) Direct
The guarantee shall constitute a
direct claim on the guarantor.
When a qualifying default or nonpayment by the obligor occurs, the
reporting bank shall pursue the
guarantor for amounts outstanding
under the loan, rather than having
to continue to pursue the obligor.
When the guarantee provides only
for the payment of principal
amounts, any interest amount and
other unprotected payments shall
be regarded as unsecured amounts.
Payment by the guarantor in terms
38
Management comments
7
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
7.3.6
of the guarantee may grant the
guarantor the right to pursue the
obligor for amounts outstanding
under the loan.
(iv) Explicit
Attest procedures
Bank practice and Findings
The guarantee shall be linked to
specific exposures, so that the
extent of the cover is duly defined
and incontrovertible.
7.3.7
(v) Irrevocable
Other than the reporting bank's
non-payment of money due in
respect of the guarantee, there
shall be no clause in the contract
that would allow the guarantor
unilaterally to cancel the guarantee
or increase the effective cost of the
protection
as
a
result
of
deterioration in the credit quality of
the protected exposure.
7.3.8
(vi) Unconditional
There shall be no clause in the
guarantee that could prevent the
guarantor from being obliged to pay
out, in a timely manner, in the
event of the original obligor failing
to make the payment(s) due.
7.3.9
(vii)
Robust
process
risk-management
While guarantees reduce credit risk,
they simultaneously increase other
risks to which a bank is exposed,
such as legal and operational risks.
Therefore a bank shall employ
robust procedures and processes to
control
the
aforesaid
risks.
As a minimum, a robust riskmanagement process relating to
guarantees shall include the
fundamental elements specified
below.
(aa)
Strategy
A duly articulated strategy for
guarantees shall form an intrinsic
part of a bank's general credit
39
Management comments
7
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
strategy
strategy.
and
overall
Attest procedures
Bank practice and Findings
liquidity
(bb) Focus on underlying credit
A bank shall continue to assess a
guaranteed exposure on the basis
of the borrower's creditworthiness.
A bank shall obtain and analyse
sufficient financial information to
determine the obligor's risk profile
and its risk-management and
operational
capabilities.
(cc)
Systems
A bank's policies and procedures
shall be supported by management
systems capable of tracking the
location and status of guarantees.
A bank shall regularly review its
policies and procedures in order to
ensure that the said policies and
procedures remain appropriate and
effective.
(dd)
Concentration
risk
A bank shall have in place a duly
defined policy with respect to the
amount of concentration risk that it
is
prepared
to
accept.
A bank shall take guaranteed
positions into account when
assessing
the
potential
concentrations
in
its
credit
portfolio,
including
when
determining its concentration risk in
terms of section 73 of the Act.
In
order
to
mitigate
its
concentration risk a bank shall
monitor general trends affecting
relevant
guarantors.
(ee)
Roll-off
risks
When a bank obtains guarantees
that differ in maturity from the
underlying credit exposure, the
40
Management comments
7
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
Attest procedures
Bank practice and Findings
bank shall monitor and control its
roll-off risks, that is, the fact that
the bank will be exposed to the full
amount of the credit exposure
when the guarantee expires.
7.3.10
The bank may be unable to obtain
further guarantees or to maintain
its capital adequacy when the
guarantee expires.
(14)(c)(i)(B) As a minimum, a bank
that adopted the advanced IRB
approach for the recognition of risk
mitigation in respect of guaranteesshall assign to all relevant obligors
and eligible guarantors a borrower
rating and calculate its own
estimates of LGD in respect of the
bank's various exposures provided
that the bank shall have in place
duly
specified
criteria(i) to adjust its borrower grades
(ii) to adjust its LGD estimates
(iii) to allocate exposures to
relevant retail or receivable pools,
which criteria
(aa) shall comply with the relevant
minimum
requirements
for
assigning borrower or facility
ratings specified in subregulation
(11)(b)
above
(bb) shall be plausible and intuitive
(cc) shall take into account all
relevant
information
(dd)
shall
incorporate:
(i)
the guarantor's ability and
willingness
to
honour
its
commitments in terms of the
guarantee
(ii) any correlation between the
guarantor's ability to honour its
commitments in terms of the
guarantee and the obligor's ability
to repay any amounts due
(iii) the effect of any residual risk,
such as a currency mismatch
between the guarantee and the
underlying exposure
7.3.11
(14)(c)(i)(C) a bank that adopted the
advanced IRB approach for the
41
Management comments
7
Regulation
Criteria
Criteria for the recognition of credit risk mitigation instruments
Attest procedures
Bank practice and Findings
recognition of risk mitigation in
respect of guarantee shall not in the
calculation of the bank’s riskweighted exposure reflect the
effect of double default otherwise
than in accordance with the
relevant requirements specified in
paragraph (f), that is, the adjusted
risk weight relating to a particular
exposure shall not be less than a
comparable direct exposure to the
relevant guarantor unless the bank
calculates the said adjusted risk
weight in accordance with the
relevant requirements specified in
paragraph
(f)
below,
provided
that
whenever
a
guarantee obtained in respect of an
exposure results in a higher capital
requirement for the reporting bank
than before the recognition of such
guarantee, the reporting bank may
ignore the effect of the said
guarantee.
7.3.12
(14)( c)(ii)
Eligible guarantors
A bank that adopted the advanced
IRB approach for the recognition of
risk
mitigation
relating
to
guarantees may recognise the
effect of a guarantee obtained from
any guarantor provided that
(A) the guarantee shall comply with
the
relevant
minimum
requirements
specified
in
subregulation
(7)(c)(iv)
above
(B) the bank shall have in place a
comprehensive policy and criteria in
respect of the types of guarantors
acceptable to the bank for risk
mitigation purposes.
7.4
7.5
Credit derivative instruments
Double default
42
Management comments
8
8.1
8.1.1
Regulation
Process and control environment
Independent validation
The rating and risk estimation
systems and processes of the bank
should have been subjected to
appropriate internal controls and
independent review.
Criteria
Attest procedures
The scope of the work performed by
the internal audit and independent
validation functions includes an
annual assessment of the rating
system.
8.1.1.1. Obtain an understanding of the
coverage of the work performed by internal
audit and the independent validation
functions.
8.1.2
The scope of the work of these
functions is appropriate to the
nature of the bank’s activities.
8.1.3
The work has been appropriately
performed during the current year.
The results of the work have been
appropriately reported to senior
management and the board.
8.1.4
The functions are adequately skilled
and are independent.
Bank practice and Findings
Evaluate whether the scope covers all material
aspects and models, relative to the materiality
determined with the SARB.
8.1.2.1. For a sample of material models,
understand
the
models
from
the
developmental evidence. Review the work
programs applied to assess whether they cover
the elements covered in this program. Where
not, assess whether omissions are material
relative to our understanding of the model.
8.1.3.1. For a sample of validations performed
by internal audit and the independent
validation function:
Re-perform certain tests applied by the
validation units.
Ensure consistency of
findings.
Consider the extent of supervision and review
of validation procedures.
Evaluate whether the reported findings are an
appropriate summary of the findings.
Review the reporting to the board and senior
management.
Determine whether significant matters have
been included.
8.1.4.1. Ensure separation of duties in respect
of the review of the models and the
development and use of the models. Confirm
by discussion that the performance evaluation
criteria applied to staff involved in validation
do not include the successful approval of the
models by the SARB.
8.1.4.2. Evaluate the quantitative skills of the
validation personnel and evaluate whether
they are sufficient to perform the relevant type
of validation work.
8.1.5
The bank shall have in place a
robust system to validate the
accuracy and consistency of the
bank’s
rating
systems
and
processes, including all estimates of
relevant risk components, which
internal assessments shall be based
on long data histories, covering a
range of economic conditions and
ideally one or more complete
business cycles;
The independent validation and / or
internal audit function regularly (but
not less often than annually) tests
the power and stability of the
ratings system and the accuracy of
estimates.
These tests are
performed based on long data
histories over a full economic cycle.
8.1.5.1. Review the work programs of the
independent validation unit and internal audit
to ensure that they achieve coverage of all
material aspects of the risk rating and
estimation systems annually (including related
processes, data and systems).
Internal audit reviews the ratings
systems and processes, and the
work of the independent validation
function.
43
Management comments
8
8.1.6
8.1.7
8.1.8
Regulation
Process and control environment
The bank shall regularly compare
realised
default
rates
with
estimated PD ratios in respect of
each grade and shall demonstrate
to the satisfaction of the Registrar
that the realised default rates are
within the expected range for a
particular grade;
Criteria
Attest procedures
The bank regularly tests expected
PDs against actual.
8.1.6.1. Review the work programme of the
independent validation unit to ensure that
they perform calibration tests (see 4.4 for
example of test).
The bank shall duly document the
data and the methods used to
compare realised default rates with
estimated PD ratios in respect of
each grade, including the periods
that were covered and any changes
in the data and methods that were
used,
which
analysis
and
documentation shall be updated at
appropriate intervals, but not less
frequently than once every year;
The bank documents the data and
the methods used to compare
realised default rates with estimated
PD ratios in respect of each grade,
including the periods that were
covered and any changes in the data
and methods that were used; the
analysis and documentation are
updated at appropriate intervals,
but not less frequently than once
every year
8.1.7.1. Review the validation documentation
and assess completeness. For a sample of
material models, walk through the validation
process to assess whether what has been
documented has actually been implemented.
The bank shall make use of
quantitative validation tools and
comparisons with relevant external
data sources in order to validate the
bank’s internal estimates of risk
components;
The bank shall demonstrate to the
satisfaction of the Registrar that the
bank’s quantitative testing methods
and validation methods do not vary
systematically with the economic
cycle;
The bank performs backtesting and
benchmarking tests of its risk
component (i.e. PD, LGD and EAD
estimates).
The bank applies validation methods
and quantitative tests consistently;
the bank utilises all available
historical data in performing
quantitative validation techniques;
adjustments are made to take into
consideration the point in the cycle;
business cycle adjustments are
made
in
accordance
with
documented policy
8.1.9
8.1.10
8.1.11
Bank practice and Findings
8.1.7.2. Review the work programme of the
independent validation unit to ensure that
they perform calibration tests of risk
component estimates (see 4.4 for example of
test).
8.1.8.1. Review the testing methodology and
confirm that all available historical information
is taken into account in tests.
8.1.9.1. Understand what adjustments, if any,
are made to take into account the point in the
economic cycle.
Assess whether the
adjustment is reasonable, and made in terms
of documented policy
The bank shall have in place
sufficiently
robust
internal
standards to deal with situations
where realised PD ratios deviate
substantially from expected PD
ratios provided that when the
realised values continue to be
higher than expected values the
bank shall adjust its estimates of
risk components upward in order to
reflect the appropriate default and
loss experiences.
Results are within policy tolerances
else appropriate remedial action is
planned.
There is appropriate
reporting of results against policy
tolerances to senior management.
8.1.10.1. Test that deviation from policy
tolerances are within policy thresholds. Where
not, review evidence that the board
considered why they are satisfied with the
deviation (including documenting reasons), or
that plans for remedial action have been put in
place.
8.1.11.1. Inspect reports and minutes that
evidence that deviations from policy
44
Management comments
8
Regulation
Process and control environment
Criteria
Attest procedures
Bank practice and Findings
thresholds have been reported to senior
management and the board (or designated
sub-committee).
8.1.12
8.2
8.2.1
Statistical models and mechanical
methods to assign borrower and
facility ratings or estimate PD ratios,
LGD ratios and EAD amounts shall
be subject to a regular validation
process of data inputs, including an
assessment
of
accuracy,
completeness and appropriateness.
Statistical models and mechanical
methods to assign borrower and
facility ratings or estimate PD ratios,
LGD ratios and EAD amounts shall
be subject to written policies and
procedures for human review and
judgment provided that when
human judgment is used to override
the model’s output, the bank shall
separately keep track of the
performance of the relevant
exposure; (B2 p428)
Controls over use of models
The bank’s policy shall duly specify
the situations in which the senior
management of the bank may
override the output of the rating
process, including how and to what
extent such overrides may be used,
and the names of senior
management who may approve
overrides of the model’s output; (B2
p428)
A party independent of model
development and use periodically
tests a sample of the input data to
source to ensure validity and
accuracy; a sample of the source
data to the model to test
completeness
All model based ratings are subject
to human review. See above 7.2 on
overrides.
A bank has guidelines and processes
for monitoring cases where human
judgment has overridden the
model’s rating, variables were
excluded or inputs were altered.
Guidelines include identification of
individuals
responsible
for
approving overrides and the extent
to which overrides can be made.
The bank has a policy stating the
tolerance for overrides.
Where the override tolerance is
exceeded, the issue is appropriately
escalated to senior management
who takes appropriate remedial
action.
The bank monitors the occurrence
of overrides, including capturing the
reason for override.
Banks identify overrides and
separately track their performance.
8.2.2
Statistical models and mechanical
methods to assign borrower and
facility ratings or estimate PD ratios,
LGD ratios and EAD amounts shall
8.1.12.1. For a sample of material models,
review the work performed by internal audit to
ensure accuracy, validity and completeness of
inputs. Re-perform a sample of their tests to
ensure consistency of findings. Review their
reports to ensure completeness and accuracy
of reporting of their findings.
Out of sample and out of time tests
are conducted on the models prior
to approval; models are approved
by senior management and the
8.2.1.1. Assess documentation and confirm the
following is accounted for:
1) A bank has guidelines and processes for
monitoring cases where human judgment
has overridden the model’s rating,
variables were excluded or inputs were
altered.
2) Guidelines include identification of
individuals responsible for approving
overrides and the extent to which
overrides can be made.
3) The bank has a policy stating the
tolerance for overrides.
8.2.1.2. Review documented process for
capturing and monitoring overrides. Ensure
the bank monitors the occurrence of overrides,
including capturing the reason for override.
Ensure the performance of overrides is
separately tracked.
8.2.1.3. Inspect record of overrides for the
period.
Where the override tolerance is
exceeded, ensure the issue has been
appropriately
escalated
to
senior
management. Evaluate the appropriateness of
any remedial plans.
8.2.2.1. Evaluate design and implementation of
following controls:

Out of sample and out of time tests are
conducted on the models prior to
45
Management comments
8
Regulation
Process and control environment
be used appropriately.
8.2.3
The bank shall have clear guidelines
and processes in place to monitor
situations in which variables or risk
inputs to models were altered.
8.3
8.3.1
Data maintenance
As a minimum, a bank that adopted
the IRB approach for the
measurement of the bank’s
exposure to credit risk shall collect
and store data in respect of all key
borrower
and
facility
characteristics.
The data shall be sufficiently
detailed to allow retrospective reallocation of obligors and facilities
to the bank’s various risk grades;
8.3.2
8.3.3
8.3.4
8.3.5
8.3.6
8.3.7
8.3.8
(C) Based on the definition of
default specified in regulation 65, a
bank shall record all actual defaults
in respect of all exposures subject
to the IRB approach; (B2 p456)
The data shall in the case of retail
exposures include- (B2 p433)
(i) the data that was used to
allocate particular exposures to
particular pools, including the data
relating
to
borrower
and
transaction risk characteristics;
(ii) the data in respect of delinquent
exposures;
(iii) data related to the estimated
PD ratios, LGD ratios and EAD
amounts associated with each
relevant pool of exposures;
The data shall in the case of
Criteria
board; controls over move to the
production environment; change
controls once in production
environment; model performance
reporting to senior management
and the board.
The bank shall have clear guidelines
and processes in place to monitor
situations in which variables or risk
inputs to models were altered.
Attest procedures
Bank practice and Findings
approval;
models are approved by senior
management and the board;

change controls over move to the
production environment;

change controls once in production
environment;

model performance reporting to senior
management and the board
8.2.3.
Identify
control
design
and
implementation.

The bank collects and stores data in
respect of all key borrower and
facility characteristics.
The bank keeps sufficient data on
borrower and facility characteristics
to enable the retrospective reallocation of obligors and facilities to
risk grades.
The bank records all actual defaults
that meet the definition of default.
In the case of retail exposures the
bank records:
(i) the data that was used to allocate
particular exposures to particular
pools, including the data relating to
borrower and transaction risk
characteristics;
(ii) the data in respect of delinquent
exposures;
(iii) data related to the estimated PD
ratios, LGD ratios and EAD amounts
associated with each relevant pool
of exposures;
(E) shall in the case of defaulted
8.3.2.1. From discussion and review of the
developmental evidence, identify changes to
the rating system in the period under review.
Identify the extent to which historical
exposures have been re-rated using the new
rating system. Where re-rating has occurred,
identify the extent to which re-rating has been
based
on
empirical
information
or
assumptions. Where no-rating has occurred or
re-rating has not been based on empirical
evidence, assess materiality.
8.3.3.1. Review data sample.
Ensure all
exposures meeting definition of default are
flagged.
8.3.5.1. For a sample of exposures, test that
the data has been recorded for 5 years.
8.3.6.1. For a sample of exposures, test that
the data has been recorded for 5 years.
8.3.7.1. For a sample of exposures, test that
the data has been recorded for 5 years.
8.3.8.1. For a sample of exposures, test that
46
Management comments
8
8.4
8.4.1
8.4.2
8.4.3
8.4.4
8.4.5
Regulation
Process and control environment
defaulted retail exposures, include
data in respect of the pool to which
the exposure was assigned during
the year preceding the default and
the realised outcomes in respect of
the LGD ratio and the EAD amount.
(B2 p433)
Credit policy
As a minimum, a bank that adopted
the IRB approach for the
measurement of the bank’s
exposure to credit risk in respect of
positions held in the bank’s banking
book shall have in place a duly
documented credit policy, which
credit policy(A) shall be applied consistently
over time for internal risk
management purposes and in terms
of the IRB approach; (B2 p444,
p458)
(B) shall in the case of exposures
relating to a corporate institutions,
sovereigns or banks duly specify the
relationship between borrower
grades in terms of the level of risk
that each grade implies, that is, the
perceived and measured risk shall
increase as the credit quality of an
exposure declines from one grade
to the next; (B2 p397)
C) shall in the case of exposures
relating to a corporate institutions,
sovereigns or banks duly specify the
risk represented in each risk grade
in terms of both a description of the
probability of default risk typical for
obligors assigned to the specific
grade and the criteria used to
distinguish that level of credit risk;
(B2 p397)
(D) shall duly specify the treatment
of individual entities in a connected
group, including the circumstances
under which the same rating may or
may not be assigned to all or some
related entities; (B2 p423)
Criteria
Attest procedures
retail exposures, include data in
respect of the pool to which the
exposure was assigned during the
year preceding the default and the
realised outcomes in respect of the
LGD ratio and the EAD amount. (B2
p433)
the data has been recorded for 5 years.
The bank has a board approved
credit risk policy.
8.4.1.1. Confirm that there is a policy in place
that is Board Approved
The policy has been consistently
applied.
8.4.2.1. Test a sample of transactions to test
consistent application of the policy. Obtain a
management representation.
The relationship between borrower
grades and PD estimates is
monotonic.
8.4.3.1. Test the relationship between rating
and PD applied in the bank’s rating scale to
ensure monotonic.
Policy relating to each model
includes description of PD range
associated with each grade, and the
factors taken into account in the
rating system.
8.4.4.1. Inspect the policy to ensure that it
model includes description of PD range
associated with each grade, and the factors
taken into account in the rating system.
The policy covers the treatment of
connected groups, including the
circumstances under which the
same rating may or may not be
assigned to all or some entities.
8.4.5.1. Inspect the policy to ensure that it
includes the definition and treatment of
connected groups.
Bank practice and Findings
The policy with respect to
connected groups is consistently
applied.
8.4.6
(E) shall reinforce and foster the
independence of the rating process;
The policy addresses the adequate
segregation of duties.
Rating
assignments and reviews are
performed by an independent party
who does not directly stand to
8.4.6.1. The policy addresses the adequate
segregation of duties by requiring the
performance of rating assignments and by an
independent party who does not directly stand
to benefit from the extension of credit (e.g.
47
Management comments
8
Regulation
Process and control environment
Criteria
Attest procedures
8.4.7
(F) shall duly specify the bank’s
process as regards the assignment
of ratings to credit exposures;
(comments received from banks)
benefit from the extension of credit.
The operational processes for
ratings assignment must be
documented
in
the
bank’s
procedures.
sales incentives).
8.4.7.1. Review the procedure documentation
to determine whether the operational
processes for ratings assignment are
documented. Walk through the assignment
process
to
determine
whether
the
documented process has been implemented.
8.4.8
(G) shall duly specify the situations
in which the senior management of
the bank may override the output
of the rating process, including how
and to what extent such overrides
may be used, and the names of
senior management who may
approve overrides of the model’s
output; (B2 p428)
A bank has guidelines and processes
for monitoring cases where human
judgment has overridden the
model’s rating, variables were
excluded or inputs were altered.
Guidelines include identification of
individuals responsible for
approving overrides and the extent
to which overrides can be made.
8.4.8.1. Assess documentation and confirm the
following is accounted for:
1)
2)
The bank has a policy stating the
tolerance for overrides.
3)
Where the override tolerance is
exceeded, the issue is appropriately
escalated to senior management
who takes appropriate remedial
action.
The bank monitors the occurrence
of overrides, including capturing the
reason for override.
Banks identify overrides and
separately track their performance.
8.4.9
8.4.10
8.4.11
8.4.12
(H) shall contain comprehensive
requirements
to
assess
the
creditworthiness of persons with
overdraft facilities; (B2 p459)
The rating system for overdrafts is
used in the sanctioning process.
(I) shall deal comprehensively with(B2 p458) (PP21 ND76)
(i) overdue amounts, including the
manner in which the bank
determines the number of past due
days in respect of credit exposures;
n/a
cc) exposures that are in default;
Bank practice and Findings
A bank has guidelines and processes
for monitoring cases where human
judgment has overridden the model’s
rating, variables were excluded or
inputs were altered.
Guidelines include identification of
individuals responsible for approving
overrides and the extent to which
overrides can be made.
The bank has a policy stating the
tolerance for overrides.
Review documented process for capturing and
monitoring overrides.
Ensure the bank
monitors the occurrence of overrides,
including capturing the reason for override.
Ensure the performance of overrides is
separately tracked.
Inspect record of overrides for the period.
Where the override tolerance is exceeded,
ensure the issue has been appropriately
escalated to senior management. Evaluate the
appropriateness of any remedial plans.
No expression on level of
“comprehensiveness”
8.4.9.1. Obtain an understanding of the
process for extending overdraft facilities.
Ensure that the sanctioning decision includes
consideration of factors included in the
overdraft rating system.
The policy includes guidance on the
manner in which days past due is
calculated.
No expression on level of
“comprehensiveness”
8.4.11.1. Test that the policy includes guidance
and definitions on the manner in which days
past due is calculated.
The policy with respect to
calculation of days past due has
been consistently applied.
The policy includes guidance on the
definition of default across all
portfolios; the policy definition of
Review the developmental evidence associated
with material models. Ensure that the method
of calculating days past due is consistent with
the policy.
8.4.12.1. Test that the policy includes guidance
on the definition of default across all
portfolios; the policy definition of default is
48
Management comments
8
8.4.13
Regulation
Process and control environment
8.5
8.5.1
Attest procedures
default is compliant with the
requirements of the Regulations;
the policy with respect to definition
of default has been consistently
applied.
compliant with the requirements of the
Regulations.
The policy contains guidance on the
treatment of re-aged facilities
including:
(aa) persons responsible for
approval;
(bb) reporting requirements;
(cc) the minimum age of a facility or
exposure before it is eligible for reageing;
(aa) persons responsible for
approval;
(bb) reporting requirements;
(cc) the minimum age of a facility or
exposure before it is eligible for reageing
;
(dd) the delinquency levels of
facilities or exposures that are
eligible for re-ageing;
(ee) the maximum number of
exposures per facility, eligible for reageing;
(ff) a reassessment of the
borrower’s capacity to repay
amounts due;
The policy deals with when re-aged
facilities are classified as defaulted
or not. [PP147.2 – include guidance
from position papers]
The policy with respect to re-aged
exposures has been consistently
applied.
(aa) persons responsible for approval;
See above.
8.4.14. See above.
Rating
system
documentation
includes required item.
8.5. Review the developmental evidence to
ensure it includes documentation of the items
listed below (i.e. test the completeness of
documentation).
n/a
8.5.1. For a sample of material models, assess
whether the methodologies, processes,
controls or tests documented in the
developmental evidence have actually been
implemented in the models or modeling
process (i.e. test the validity of the
(iv) the granting of extensions,
deferrals, renewals or rewrites in
respect of existing accounts;
Documentation
The rating and risk estimation
systems and processes of a bank
that adopted the IRB approach for
the measurement of the bank’s
exposure to credit risk in respect of
positions held in the bank’s banking
book shall be duly documented,
which
documentation,
as
a
minimum- (B2 p418 to p420)
(i) shall address matters such as-
Bank practice and Findings
Review the developmental evidence associated
with material models. Ensure that the method
of identifying defaulted exposes is consistent
with the policy.
8.4.13.1. Test that the policy contains guidance
on the treatment of re-aged facilities including:
(dd) re-ageing of facilities or
exposures, which re-aging, amongst
other
things,
shall
deal
comprehensively with-
(dd) the delinquency levels of
facilities or exposures that are
eligible for re-ageing;
(ee) the maximum number of
exposures per facility, eligible for
re-ageing;
(ff) a reassessment of the
borrower’s capacity to repay
amounts due;
8.4.14.
Criteria
(bb) reporting requirements;
(cc) the minimum age of a facility or exposure
before it is eligible for re-ageing;
(dd) the delinquency levels of facilities or
exposures that are eligible for re-ageing;
(ee) the maximum number of exposures per
facility, eligible for re-ageing;
(ff) a reassessment of the borrower’s capacity
to repay amounts due;
Test that the policy deals with when re-aged
facilities are classified as defaulted or not, and
that the treatment is compliant with the
requirements of PP147.
8.4.13.2. For a sample of models, review the
developmental evidence to evaluate whether
the treatment of re-aged exposures is
consistent with the policy.
49
Management comments
8
Regulation
Process and control environment
Criteria
(aa) specific definitions of default
and loss, which definitions shall
materially be consistent with the
definitions contained in this
subregulation (11) and regulation
65;
(bb) portfolio differentiation ;
Rating
system
documentation
includes required item. Definitions
of default which are consistent with
the requirements of subregulation
(11) and regulation 65
Attest procedures
Bank practice and Findings
documentation).
8.5.2
8.5.3
8.5.4
8.5.5
8.5.6
8.5.7
(cc) rating criteria and the rationale
for the bank’s choice of particular
internal rating criteria provided that
the bank shall be able to
demonstrate to the satisfaction of
the Registrar that the selected
rating criteria and procedures are
likely to result in ratings that
meaningfully differentiate risk;
(dd) the responsibilities of persons
responsible for the rating of
borrowers and facilities;
(ee) definitions relating to rating
exceptions and the persons
authorised to approve any rating
exceptions;
(ff) the frequency of rating reviews;
8.5.8
(gg) management oversight and the
bank’s internal control structure;
8.5.9
(hh) the history of major changes in
the bank’s risk rating process;
8.5.10
(ii) shall provide adequate evidence
of the bank’s compliance with all
relevant minimum requirements;
8.5.11
(iii) shall duly indicate any
differences between the bank’s risk
estimates for purposes of complying
with the IRB approach and for
internal risk management purposes,
such as pricing; (B2 p444)
(iv) shall in the case of statistical
models used in the bank’s rating
process, comprehensively deal with-
8.5.12
Rating system documentation
includes required item. What is
documented has actually been
implemented.
Rating system documentation
includes required item.; evidence to
support rating system discrimination
falls within policy tolerances (see
above)
Rating system documentation
includes required item. What is
documented has actually been
implemented.
Rating system documentation
includes required item. What is
documented has actually been
implemented.
Rating system documentation
includes required item. What is
documented has actually been
implemented
Rating system documentation
includes required item. What is
documented has actually been
implemented.
Rating system documentation
includes required item. What is
documented has actually been
implemented.
There is adequate documentation of
all policies, procedures and tests
performed (including results)
pursuant to these requirements.
8.5.11. Rating system
documentation includes required
item. What is documented has
actually been implemented.
n/a
50
Management comments
Regulation
Process and control environment
(aa) the relevant methodologies,
including a detailed outline of the
theory, assumptions and/ or
mathematical and empirical basis to
assign risk estimate to risk grades,
individual obligors, exposures or
pools;
Criteria
8.5.14
(bb) the data sources used;
8.5.15
(cc) the process to validate the
model;
8.5.16
(dd) any circumstances under which
the model does not work
effectively.
8.5.14.
Rating
system
documentation includes required
item. What is documented has
actually been implemented.
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
Rating
system
documentation
includes required item. What is
documented has actually been
implemented.
8.6
8.6.1
Controls relating to overdraft facilities
The bank’s credit policy shall The rating system for overdrafts is
contain
comprehensive used in the sanctioning process.
requirements
to
assess
the
creditworthiness of persons with
overdraft facilities; (B2 p459)
8
8.5.13
8.6.2
8.6.3
8.6.4
A bank shall determine and specify
a credit limit in respect of all
authorised
overdraft
facilities,
which credit limit(aa) shall in writing be brought to
the attention of the relevant client
of the bank;
(bb) shall on a continuous basis be
monitored by the relevant bank for
compliance with the limit by the
relevant client;
Attest procedures
Bank practice and Findings
8.5.13.
Rating
system
documentation includes required
item. What is documented has
actually been implemented.
No
expression
“comprehensiveness”.
on
level
of
The bank has a credit limit in respect
of all overdraft facilities.
8.6.1.1. Obtain an understanding of the
process for extending overdraft facilities.
Ensure that the sanctioning decision includes
consideration of factors included in the
overdraft rating system.
8.6.2.1. Identify control
design and
implementation.
The bank notifies the borrower of
the credit limit in writing.
8.6.3.1. Identify control design and
implementation.
The bank monitors the client’s
compliance with the credit limit on a
continuous basis; reporting of
breaches; relationship between
breaches and definition of default:
If an authorised overdraft is not
brought under the limit within 90180 days (subject to applicable
trigger), it should be considered
defaulted; Days past due for
unauthorised overdrafts commence
once any credit is granted to a
customer. If not repaid within 90 to
180 days, the exposure should be
considered in default.
The credit limit on unauthorised
overdraft facilities is zero.
8.6.4.1. Identify
implementation.
8.6.5
(ii) shall assign a limit of zero to any
unauthorised overdraft facility.
8.7
8.7.1
Controls relating to unutilized facilities
The bank has policies, systems and
The bank has policies, systems and
procedures in place which are
procedures in place which are
control
design
and
8.6.4.2. For a sample of models, test that
defaults are correctly calculated for authorised
and unauthorised overdrafts (including correct
approach adopted for counting days past due)
8.6.5.1. Identify
implementation.
control
design
and
8.7.1.1. Identify
implementation.
control
design
and
51
Management comments
8
8.7.2
8.7.3
Regulation
Process and control environment
adequate to prevent further
drawings in circumstances short of
payment default, such as covenant
violations or other technical default
events.
On a daily basis, the bank monitors
facility amounts and current
outstanding amounts against
committed lines.
The bank monitors any changes in
outstanding amounts per borrower
and per risk grade.
Criteria
Attest procedures
adequate to prevent further
drawings in circumstances short of
payment default, such as covenant
violations or other technical default
events.
On a daily basis, the bank monitors
facility amounts and current
outstanding
amounts
against
committed lines.
The bank monitors any changes in
outstanding amounts per borrower
and per risk grade.
8.7.2.1. Identify
implementation.
Bank practice and Findings
control
design
and
8.7.3.1. Identify control design and
implementation.
52
Management comments
9
9.1.1
Regulation
Use Test
The rating and risk estimation
systems and processes of the bank
should have
produced internal
ratings and default and loss
estimates that formed an integral
part of the bank’s(i)
(ii)
(iii)
(iv)
Criteria
Attest procedures
The bank has documented how it
has complied with the use test for all
material rating, PD, LGD and EAD
models.
9.1.1.1. Review of documentation (including
reports to management) to ascertain how it
has used ratings, PD, LGD and EAD ratings in
the areas indicated. Walk through the
processes documented, to assess whether the
documented use has been implemented.
Bank practice and Findings
credit approval process;
risk
management
process;
internal capital allocation
process;
corporate
governance
process;
53
Management comments
10
10.1
Regulation
Experience Test
For a minimum period of three
years or such lesser minimum
period as may be specified in
writing by the Registrar, prior to a
bank’s implementation of the
foundation IRB approach for the
measurement of the bank’s
exposure to credit risk, the rating
and risk estimation systems and
processes of the bank should have(B2 p389, p438 to p445)
Criteria
Attest procedures
Build in transition arrangements –
PP154.
10.1.1.1. Review waiver application and sign
off by CEO to assess how the bank plans to
meet the rating system usage requirements.
The bank has applied the internal
rating system to produce ratings and
PDs for the three years prior to
assessment date
Bank practice and Findings
Obtain supporting documentation to support
the waiver application assertion.
54
Management comments
11
11.1
11.1.1
11.2
11.2.1
Regulation
Stress Testing
Criteria
Attest procedures
23(11)(b)(ix) As a minimum, a
bank that adopted the IRB
approach for the measurement of
the Bank’s exposure to credit risk
shall have in place a stresstesting process in respect of the
Bank’s exposure to credit risk,
which stress testing processScenarios and Events
The Bank has policy with respect
to the stress testing of the pillar 1
credit risk requirement that has
been approved by the designated
committee.
11.1.1.1 Obtain the stress testing policy
and inspect that the policy has been
approved by the designated committee.
[23(11)(b)(ix) As a minimum, a
bank that adopted the IRB
approach for the measurement of
the Bank’s exposure to credit risk
shall have in place a stresstesting process in respect of the
Bank’s exposure to credit risk,
which stress testing process- ]
(D) shall assess the effect of a
recession on the bank’s PD
ratios, LGD ratios and EAD
amounts;
The Bank has established a
methodology for estimating the
impact of a recession on PDs,
LGDs and EADs. The
methodology has been
documented and consistently
applied.
11.2.1.1 Inspect that of the events and/or
scenarios considered; at least one is
defined by the Bank as a recession.
Bank practice and Findings
Policy
11.1.1.2 Enquire and inspect that the
stress testing policy has been
implemented.
11.2.1.2 Inspect the:

Bank’s actual PD, LGD and EAD
numbers during similar conditions
if possible or

other empirical evidence
and compare this to industry norms to
conclude on whether classification of such
a scenario is a recession when compared
to industry norms.
11.2.1.3 Inspect supporting documentation
to confirm that the Bank’s methodology
assesses the impact of such a recession
on PDs, LGDs and EADs
11.3
11.3.1
Stress Testing Application
39(8)(f)(i)The results of Stress
Testing:
A. Shall periodically be
reviewed by the senior
management of the bank;
A. Stress testing results are
reviewed periodically by senior
management of the Bank.
11.3.1.1 Inspect whether the results of
stress testing is inspected by senior
management (or other committee / party as
per Bank policy) on a periodic basis.
11.3.2
[23(11)(b)(ix) As a minimum, a
bank that adopted the IRB
approach for the measurement of
the Bank’s exposure to credit risk
shall have in place a stresstesting process in respect of the
Bank’s exposure to credit risk,
which stress testing process-]
For protected exposures subject
to the double default approach,
ensure that an assessment if the
impact of the below is performed:
11.3.2.1 Inspect supporting documentation
to confirm that for protected exposures
subject to the double default approach, an
assessment of the impact of potential
stress of both the obligors and protection
providers is performed in line with the
bank’s policy.
(B) shall in the case of protected
exposure subject to the double
default approach envisaged in
sub-regulation (12)(g) include an
assessment of the impact of-
(i) a deterioration in the credit
quality of protection providers, in
particular the impact of protection
providers falling outside the
eligibility criteria specified in subregulation (12)(g) due to rating
changes;
(ii) the default of one but not both
the obligor and the protection
55
Management comments
11
Regulation
Stress Testing
Criteria
(i) a deterioration in the credit
quality of protection providers, in
particular the impact of protection
providers falling outside the
eligibility criteria specified in
subregulation (12)(g) due to
rating changes;
provider, and the consequent
increase in risk exposure and
required capital and reserve
funds at the time of the said
default;
Attest procedures
Bank practice and Findings
11.3.3.1 Inspect supporting documentation
to confirm that the Bank’s process includes
an assessment of internal and/or external
(as appropriate) ratings migration in line
with the Bank’s stress testing policy.
.
(ii) the default of one but not both
the obligor and the protection
provider, and the consequent
increase in risk exposure and
required capital and reserve
funds at the time of the said
default;
11.3.3
[23(11)(b)(ix) As a minimum, a
bank that adopted the IRB
approach for the measurement of
the Bank’s exposure to credit risk
shall have in place a stresstesting process in respect of the
Bank’s exposure to credit risk,
which stress testing process- ]
The process considers internal
and/or external (as appropriate,
where external refers to vendor
models, externally produced
ratings for internal credit risk
exposures) ratings migration in
respect of at least some of the
Bank’s credit risk exposures.
(E) shall make provision for an
internal ratings migration in
respect of at least some of the
Bank’s exposure to credit risk;
The process considers internal
ratings migrations in respect of at
least some of the Bank’s credit
exposures and evaluates
evidence of external ratings
migration where appropriate.
(F) Shall appropriately evaluate
evidence of rating migration in
respect of external ratings.
56
Management comments