110. Credit institutions should look beyond how many ‘grades’ a rating downgrade entails because …

Credit institutions should look beyond how many ‘grades’ a rating downgrade entails because the change in PD for a one-grade movement may not be linear (for example, the default probability over five years of an exposure rated BB is around three times that of one rated BBB, based on current data and analyses applicable to certain jurisdictions). Furthermore, because the significance of a one-grade movement would depend on the granularity of a bank’s rating system — and hence the ‘width’ of each grade — an appropriate initial segmentation should be defined to ensure that a significant increase in credit risk for an individual lending exposure or a group of lending exposures is not obscured within a segment. In this regard, credit institutions should ensure that credit risk rating systems include a sufficient number of grades to appropriately distinguish credit risk. Credit institutions should also be mindful of the fact that a significant increase in credit risk could occur prior to a movement in a credit grade.

1. Forbhreathnú

1.1 Tagairtí

1.2 Ceanglais aitheanta

1.3 Caighdeáin ghaolmhara

2. Ceanglais aitheanta

3. Caighdeáin ghaolmhara

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