Related provisions for IFPRU 4.6.12
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Article 169(3) of the UK CRR1 allows the use of direct estimates of PDs, although such a measure could be assessed over a variety of different time horizons which the EU CRR does not specify. Accordingly, the FCA considers that it acceptable in principle to use methodologies of this type in lieu of estimation of long-run averages for the grade/pool/score of the underlying rating system, where the following conditions are met. Meeting these conditions requires a firm using the
Principle 1 (in IFPRU 4.6.5 G) is the most important and challenging to achieve as it requires an ability to be able to distinguish movements not related to the economic cycle, from changes purely related to the economic cycle, and not to average these away. This is because a variable scalar approach removes the ability of a rating system to take account automatically of changes in risk through migration between its grades.