ppscoringsolutions, bank consultant in the field of IRB implementation
Strongly prefer only absolute threshold. There is strong argument against Percentage threshold. Percentage threshold depends on the exposure. In case, that Exposuret is 90 Days Past Due, but his Past Due Amount is below percentage threshold, ie. 2% * EXPOSURE, then default is not recognized. But client can start to pay one installment per month. In that case, his DPD counter is rolling. It stays 90 DPD, but the Percantage threshold is decreasing (because EXPOSURE is decreasing). The Past Due Amount is constant because 1 instalement becomes due each month, the oldest due installment is paid. Thus, constant Past Due Amount will become higger than descresing Percentage threshold and thus Default shall be recognized. Despite the fact that client is paying (with constant delay). We consider that as a paradox, which shall be avoided. However, the example is real, this is happening quite often.
NA to me
Generally, the implementation shall not be a big problem as generally each bank is using the materiality thresholds in DPD and in Default recognition. So it is modification of the current procedures.