Related provisions for BIPRU 4.2.6

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A firm must document the rationale for and analysis supporting its choice of rating criteria. A firm must document all major changes in the risk rating process, and such documentation must support identification of changes made to the risk rating process subsequent to the last review by the appropriate regulator. The organisation of rating assignment including the rating assignment process and the internal control structure must also be documented.[Note:BCD Annex VII Part 4 point
(1) This paragraph applies to the use of statistical models and/or other mechanical methods to assign exposures to obligor grades, obligor pools, facility grades or facility pools.(2) A firm must be able to demonstrate to the appropriate regulator that the model has good predictive power and that capital requirements are not distorted as a result of its use.(3) The input variables to the model must form a reasonable and effective basis for the resulting predictions. The model
(1) This paragraph contains guidance on BIPRU 4.3.51 R for the use of external models.(2) BIPRU 4.3.51 R (2) - BIPRU 4.3.51 R (8) also apply to mechanical methods to assign exposures or obligors to facility grades or pools and to a combination of models and mechanical methods.(3) The standards which a firm applies to an external model should not be lower than those for internal models. (4) The appropriate regulator will not accredit any individual model or vendor. The burden is
If a firm uses a rating model to assign exposures to the borrower or facility grades, it may reflect the data on main drivers of risk parameters by its inclusion in the model as a risk driver or as part of a subsequent process that adjusts the output of that model to calculate the risk parameters PD, LGD, conversion factor and EL.
(1) If:(a) a firm's internal experience of exposures of a type covered by a model or other rating system is 20 defaults or fewer; and(b) in the firm's view, reliable estimates of PD cannot be derived from external sources of default data, including the use of market price related data, for all the exposures covered by the rating system;the firm must estimate PD for exposures covered by that rating system in accordance with this rule.(2) A firm must use a statistical technique
Where rating agency experience or the output of a statistical default model are the primary component of PD estimation, a firm should consider whether it needs to make adjustments for other relevant information, such as internal experience, conservatism and cyclical effects. In making these adjustments, a firm should consider the extent to which it needs to take account of the potential for both under-recording of actual defaults experienced and divergence of actual experience

Table: Formulae for the calculation of risk weighted exposure amounts

This table belongs to BIPRU 4.4.57 R

Correlation (R)

0.12 × (1 - EXP(-50*PD))/(1-EXP(-50)) + 0.24*


Maturity factor (b)


(LGD*N[(1-R)-0.5*G(PD)+(R/(1-R))0.5 *G(0.999)]-PD*LGD)*



denotes the cumulative distribution function for a standard normal random variable (i.e. the probability that a normal random variable with mean zero and variance of one is less than or equal to x). G(z) denotes the inverse cumulative distribution function for a standard normal random variable (i.e. the value x such that N(x) = z).

PD = 0

For PD = 0, RW shall be: 0

PD = 1

For PD = 1:


for defaultedexposures where a firm applies the LGD values set out in BIPRU 4.4.32R and BIPRU 4.8.25R RW shall be: 0;


for defaultedexposures where a firm uses its own estimates of LGDs, RW shall be: Max {0, 12.5 *(LGD-ELBE)};

where ELBEmust be the firm's best estimate of expected loss for the defaultedexposure according to BIPRU 4.3.122 R.

[Note:BCD Annex VII Part 1 point 3]

The risk weighted exposure amount is the potential loss on the firm'sequity exposures as derived using internal value-at-risk models subject to the 99th percentile, one-tailed confidence interval of the difference between quarterly returns and an appropriate risk-free rate computed over a long-term sample period, multiplied by 12.5. The risk weighted exposure amounts at the equity exposure portfolio2 level must not be less than the total of the sums2 of the minimum risk weighted
(1) A firm must meet the standards set out in (2) to (9) for the purpose of calculating capital requirements.(2) The estimate of potential loss must be robust to adverse market movements relevant to the long-term risk profile of the firm's specific holdings. The data used to represent return distributions must reflect the longest sample period for which data is available and be meaningful in representing the risk profile of the firm's specific equity exposures. The data used must
If a firm uses scorecards for its internal credit approval process and the models it uses for the purpose of the IRB approach are fundamentally different from those scorecards, a firm's demonstration of how this is compatible with BIPRU 4.2.2 R (2) might include demonstrating that estimates calculated under the IRB approach are used to change sanctioning decisions at an individual or portfolio level. Examples of this might include amending cut-offs, the application of policy rules,
Subject to any IRB permission of the type described in BIPRU 9.12.28 G, in the case of an originator or sponsor unable to calculate KIRB and which has not obtained approval to use the ABCP internal assessment approach, and in the case of other firms where they have not obtained approval to use the supervisory formula method or, for positions in ABCP programmes, the ABCP internal assessment approach, a risk weight of 1250% must be assigned to securitisation positions which are
(1) A firm may apply for 7a waiver in respect of:(a) the IRB approach;(b) [deleted]55(c) the CCR internal model method; and(d) the VaR model approach.(2) A firm should apply for a waiver if it wants to:(a) apply the CAD 1 model approach; or2(b) apply the master netting agreement internal models approach; or2(c) disapply consolidated supervision under BIPRU 8 for its UK consolidation group or non-UK sub-group7; or2(d) apply the treatment in BIPRU 2.1 (Solo-consolidation waiver);