PRA Clarifies Approach to Onshoring of Credit Risk Rules for UK Banks
In a recent statement, PRA clarified its approach to the application of certain EU regulatory technical standards and EBA guidelines on standardized and internal ratings-based approaches to credit risk, following the end of the Brexit transition. In particular, PRA clarified the implementation approach to EBA guidelines on credit risk mitigation, economic downtown, application of the definition of default, probability of default estimation, loss given default (LGD) estimation, and the treatment of defaulted exposures. PRA also clarified approach with respect to the technical standards on economic downturn, specialized lending exposures, assessment methodology under the internal ratings-based (IRB) approach, and materiality threshold for credit obligations past due.
With respect to the EU regulatory technical standards, PRA offered clarity on the following:
- Final draft standards on the specification of the nature, severity, and duration of an economic downturn (EBA/RTS/2018/04)—These standards were not onshored into UK legislation at the end of the transition period, as it did not form part of the retained EU law under the EU (Withdrawal) Act 2018. Despite this, PRA intends to consult in due course on proposals to incorporate the requirements into UK regulation, with the implementation dates as set out in PS11/20.
- Final draft standards on specialized lending exposures (EBA/RTS/2016/02) and final draft standards on assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the IRB approach (EBA/RTS/2016/03)—PRA notes that these technical standards were not onshored into UK legislation at the end of the transition period and do not apply in the UK. Regardless, PRA will continue to apply high standards in respect of capital requirements for specialized lending exposures and its approach to model assessment.
- Standards for the materiality threshold for credit obligations past due (Regulation 2018/171)—PRA notes that these standards were onshored at the end of the transition period and continue to apply in the UK. Firms should comply with the relevant PRA Rulebook requirements and associated expectations in the supervisory statement SS11/13 (as set out in the policy statement PS7/19).
With respect to the EBA guidelines, PRA offered clarity on the following:
- Guidelines on credit risk mitigation for institutions applying the IRB approach with own estimates of LGD (EBA/GL/2020/05)—These EBA guidelines do not apply in the UK, but PRA will consider the content of these guidelines when it takes decisions related to the credit risk mitigation framework as part of the implementation of Basel 3.1 standards.
- Guidelines for estimation of LGD appropriate for an economic downturn (EBA/GL/2019/03)—As outlined in PS11/20 on probability of default and LGD estimation and SS11/13 on IRB approach, PRA expects firms to comply with these EBA guidelines.
- Guidelines on application of the definition of default (EBA/GL/2016/07)—As outlined in PS7/19 on definition of default and in SS11/13, PRA expects firms to comply with these guidelines.
- Guidelines on PD estimation, LGD estimation, and the treatment of defaulted exposures (EBA/GL/2017/16)—As outlined in PS11/20 and SS11/13, PRA expects firms to comply with these EBA guidelines, with the partial exception of paragraph 135. With respect to this aspect, PRA expects firms to comply with the guidelines in line with paragraph 13.A1 of SS11/13.
PS11/20 sets an implementation deadline of January 01, 2022, except in respect of the standards on materiality thresholds for firms only using the standardized approach, where the implementation deadline was December 31, 2020. Firms should continue to submit model change applications in line with the submission timings communicated by their supervisors.
Related Links
Keywords: Europe, UK, Banking, Credit Risk, Standardized Approach, IRB Approach, Basel, CRD5, Regulatory Capital, Specialized Lending, EBA, PRA
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Trevor Howes
IFRS 17 technical advisor; AXIS actuarial modeling system expert; extensive experience in life insurance and life reinsurance, with focus on modeling, valuation, and financial reporting
Previous Article
OSFI Outlines Work Areas in Focus for the Coming YearRelated Articles
EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
EP Reaches Agreement on Corporate Sustainability Reporting Directive
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
PRA Consults on Model Risk Management Principles for Banks
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
EC Regulation Amends Standards for Calculating Credit Risk Adjustments
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
UK Authorities Issue Regulatory and Reporting Updates for Banks
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
BCBS Issues Climate Risk Principles while HKMA Expresses Its Support
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.