PRA Offers Clarity on 2021 Benchmarking Exercise for Internal Models
A recently published statement from PRA offers more clarity on the 2021 supervisory benchmarking exercise for internal models used by the credit institutions in UK to calculate own funds requirements. The statement addresses a difference that has arisen between the intended specifications for this supervisory benchmarking exercise and the applicable UK legislation post Brexit. PRA also announced that it will set out its proposals for the 2022 benchmarking exercise (that is, in relation to the reference dates on or around year-end 2021) in a consultation paper in due course.
In its statement, PRA encourages firms, in scope of the reporting requirements, to submit market risk and credit risk information based on the published final draft package for the 2021 benchmarking exercise (published by EBA), rather than the outdated versions designed for the 2019 benchmarking exercise (that is, for year-end 2018 reporting). PRA notes that reporting based on the final draft requirements adopted by EBA, and submitted to EC, would be consistent with the approach taken by UK and other EU firms in prior years. This approach to market risk and credit risk reporting takes into account that these published annexes for the 2021 reporting package had equivalents for the 2019 supervisory benchmarking exercise that have been incorporated into UK law. In contrast, firms are not required or expected to submit the IFRS 9 data for the 2021 supervisory benchmarking exercise, considering that the annexes related to IFRS 9 data (annexes 8 and 9) are scheduled to be implemented for the first time for the 2021 benchmarking exercise and no requirement to submit IFRS 9 information has been brought into UK law.
However, PRA notes that firms may find the IFRS 9 information from the 2021 benchmarking exercise useful for internal management and control purposes, for example, in terms of facilitating comparisons between the output of IFRS 9 and other internal models or for discussions with supervisors. In considering a pragmatic approach to the current highly unusual circumstances, PRA has considered the additional reporting challenges caused by the COVID-19 pandemic as well as the technical and operational challenges to switching the data requirements at a late stage. In general, the supervisory benchmarking exercise for capital internal models is designed to enable PRA to assess internal approaches of firms for calculating own funds requirements. The reporting requirements for this exercise are updated annually to ensure that the information collected remains relevant for supervisors. If firms are not planning to use the 2021 benchmarking exercise reporting requirements for market risk and credit risk data, or have questions about their planned reporting approach, then they are advised to contact their supervisor in the first instance.
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Keywords: Europe, UK, Banking, Internal Model, Reporting, Benchmarking Exercise, Regulatory Capital, IFRS 9, Credit Risk, Market Risk, PRA
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