Ebook Credit Risk Rating At Australian Banks
Credit risk rating has become an important feature of most Australian banks’ credit risk management systems over the past decade. This reflects the efforts of institutions to strengthen credit management practices following the asset quality problems of the late 1980s/early 1990s,wider availability and growing familiarity with rating techniques of increasing sophistication within the industry, and a growing array of uses to which ratings may be applied. The Australian Prudential Regulation Authority (APRA) – as well as its predecessor as banking supervisor, the Reserve Bank of Australia – has also sought to encourage the use of credit rating systems, including through prudential guidelines originally issued to banks in 1995 and recently updated to apply to authorised deposit-taking institutions more generally.
This paper surveys the internal credit risk rating systems currently utilised by Australian banks and compares local rating practices with those found internationally. The main motivation for the paper stems from proposals that have been put forward by the Basel Committee on Banking Supervision for the reform of international bank capital adequacy guidelines, aimed at increasing the sensitivity of regulatory capital requirements to differences in institutions’ individual risk profiles. The Committee has recommended that, in conjunction with a new standardised approach to capital adequacy regulation, an internal ratings based approach could also form the basis for determining regulatory capital charges. The approach would link banks’ credit risk capital requirements to internal credit risk ratings for those institutions with suitably robust and well-developed risk rating systems that are able to meet minimum supervisory standards.
The Committee’s recommendation means that prudential regulators, such as APRA, have need to conduct further research into banks’ internal risk rating systems preparatory to commenting on, and implementing, the next round of more detailed reform proposals. The stocktake of current industry practice summarised in this paper constitutes part of that process.
The following section of the paper provides a general overview of banks’ internal credit risk rating systems. It sets out some basic concepts and a broad structure for the main part of the report, which summarises the main survey findings. This middle section focuses on the basic structure,operating design and applications of the local banks’rating systems and provides some international comparisons. The final section offers some concluding remarks.
Contents
1 INTRODUCTION
2 OVERVIEW OF INTERNAL CREDIT RISK RATING SYSTEMS
- 2.1 SYSTEM ARCHITECTURE
2.2 OPERATING DESIGN
2.3 APPLICATIONS
3 CREDIT RISK RATING AT AUSTRALIAN BANKS
3.1 ARCHITECTURE OF AUSTRALIAN BANKS’ CREDIT RATING SYSTEMS
- 3.1.1 LOSS CONCEPT
3.1.2 NUMBER OF RISK GRADES
3.1.3 DISTRIBUTION OF EXPOSURES AMONG RISK GRADES
3.1.4 POINT-IN-TIME VS THROUGH-THE-CYCLE GRADING
3.2 OPERATING DESIGN FEATURES
- 3.2.1 EXPOSURES RATED
3.2.2 CUSTOMER PD RATINGS
(i) TYPES OF RATING PROCESSES
(ii) KEY RATING RISK FACTORS
(iii) LINK TO QUANTITATIVE DEFAULT STATISTICS
- 3.2.3 FACILITY LGD RATINGS
3.2.4 SYSTEM OVERSIGHT AND CONTROL PROCESSES
3.2.5 VALIDATION PROCEDURES
3.3 RATING APPLICATIONS
4 CONCLUDING REMARKS
APPENDIX 1:TYPES OF CREDIT RISK RATING MODELS
APPENDIX 2: EXAMPLE TWO-DIMENSIONAL CREDIT RISK RATING MATRIX 29
REFERENCES
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