77 BARBADOS PUBLIC WORKERS’ CO-OPERATIVE CREDIT UNION LIMITED | CONSOLIDATED ANNUAL REPORT 2020 BARBADOS PUBLIC WORKERS’ CO-OPERATIVE CREDIT UNION LIMITED Notes to the Consolidated Financial Statements For the year ended March 31, 2020 (Expressed in Barbados dollars) 60 26. Financial Risk Management, continued 26.2 Credit risk, continued Assessment of corporate investments (term deposits), continued Each investment was assessed based on the companies’ ability to meet its short term obligations together with its historical relationship with the Group relative to meeting these same obligations. This back testing approach is allowed under IFRS 9 in relation to the ranking of investments based on the purpose for which the investment is held. The investments mentioned herein are best described as callable upon demand, with the exception of the Barbados Light & Power Limited which is held as a security deposit. The other investment contracts carry a fixed term. They can be called prior to maturity with the penalty of forgone interest. Cumulative Probability Default Rate A cumulative probability default rate was computed based on a four rating criteria; • CPD Rating 1 - Was there a significant increase in credit risk: The cumulative default rates were used as a proxy from the Moody's Investment Report Exhibit 18-Issuer-weighted cumulative default rates 1983-2019. For a significant increase in credit risk, the five year CDR was used-0.899% and 0.0% for no increase in credit risk from the origination date to the current reporting period • CPD Rating 2 - Was the company internally risk rated : This rating comprises of the AML due diligence assessment from our Compliance Department and the Financial Assessment of the company on an on-going basis.The Group currently risk-weights its corporate non-members and clients. The scoring model was guided by Regulatory AML- CFT Guidelines provides ratings of High (H), Medium (M) or Low (L). Therefore, if a Company is rated H, a five (5) year CDR was used, if M, a three (3) year CDR was applied, and if L, a one (1) year CDR was applied. • CPD Rating 3 - Was the investment approved by the FSC . Only companies with, “not applicable” assigned, will not require regulatory approval. FSC approval is a positive determinant to reduce the probability of default, since enhanced procedures are required for these companies. All investments are subject to FSC approval except term deposits with other credit unions. If the investment is not approved, this can be an indicator that the risk profile of the investment or the company has increased. If approved, the CDR was set at 0%. However, if not approved, then the five year CDR of 0.899% was applied. • CPD Rating 4 - Term to Maturity : The shorter the term to maturity, the lower the PD. Investments with a maturity period of less than one (1) year carry a lower PD than an investment with a maturity period of 1 to 5 years. Generally the probability of default will increase due to volatility within the term to maturity. Therefore, the four year rate of 0.089% was applied to investments between one to five years and investments with a maturity period of less than one year, a rate of 0.655% was applied.
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