CP13/6 - CRD IV for Investment Firms - Financial Conduct Authority

FCA 2013/xx
4.3.35 G In accordance with articles 181(1)(b) and 182(1)(b) of the EU CRR, where
the estimates appropriate for an economic downturn are more conservative
than the long run average, the FCA expects the estimate for each of these
parameters to represent the LGD or CF expected, weighted by the number of
defaults, over the downturn period. Where this is not the case, the FCA
expect the estimate to be used to be the expected LGD or CF, weighted by the
number of defaults, over a representative mix of good and bad economic
periods (see articles 179, 181 and 182 of the EU CRR).
Assignment to grades or pools
4.3.36 G To demonstrate that a rating system provides for a meaningful differentiation
of risk and accurate and consistent quantitative estimates of risk, the FCA
expects a firm, in assigning exposures to grades or pools within a rating
system, to have regard to the sensitivity of the rating to movements in
fundamental risk drivers (see article 171 of the EU CRR).
Definition of default: identification of obligors
4.3.37 G The FCA expects that if a firm ordinarily assigns exposures in the corporate,
institution or central government and central bank exposure classes to a
member of a group, substantially on the basis of membership of that group
and a common group rating, and the firm does so in the case of a particular
obligor group, the firm should consider whether members of that group
should be treated as a single obligor for the purpose of the definition of
default in article 178(1) of the EU CRR.
4.3.38 G The FCA does not expect a firm to treat an obligor as part of a single obligor
under IFPRU 4.3.37G if the firm rates its exposures on a standalone basis or
if its rating is notched. (For these purposes a rating is notched if it takes into
account individual risk factors or otherwise reflects risk factors that are not
applied on a common group basis.) Accordingly if a group has two members
which are separately rated, the FCA will not expect that the default of one
will necessarily imply the default of the other.
Definition of default: days past due
4.3.39 G IFPRU 4.3.4G contemplates that the FCA expects to exercise its discretion to
permit the days past due component of the definition of default at 180 days
for exposures secured by residential or SME commercial real estate in the
retail exposure class, as well as exposures to public sector entities (PSEs).
4.3.40 G In certain circumstances, a firm may wish to use a 90-day definition of
default, for example, where application of a 180-day definition of default
would potentially inhibit a joint decision being reached. The FCA will assess
the option used by the firm as part of its assessment of the IRB approach.
Definition of default: unlikeliness to pay in distressed restructuring
4.3.41 G The FCA expects a credit obligation to be considered as a distressed
restructuring if an independent third party, with expertise in the relevant area,
would not be prepared to provide financing on substantially the same terms
and conditions (see article 178(2)(d) of the EU CRR).
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