PRA Amends Policy on Internal Ratings-Based Mortgage Risk-Weights
PRA published the policy statement PS16/21, which updates the supervisory statement SS11/13 on internal ratings based UK mortgage risk-weights and provides feedback to responses to the associated consultation paper CP14/20. This consultation had included proposals to introduce two complementary expectations on the level of mortgage risk-weights in UK for banks applying the internal ratings-based approaches. The proposals in CP14/20 garnered 10 comments, wherein respondents were generally not in favor of the proposed minimum expectations, with concerns being raised against the proposed 7% risk-weight minimum expectation for individual UK mortgage exposures. The consultation process resulted in certain amendments, with changes to SS11/13 having been scheduled to take effect from January 01, 2022.
In response to the feedback received, PRA has made two changes to the draft policy as consulted on:
- PRA will not introduce the proposed 7% minimum risk-weight expectation on individual UK mortgage exposures. Instead, PRA will consider carefully the calibration of the incoming probability of default (PD) and loss given default (LGD) parameter floors for mortgage exposures as part of the implementation of the Basel 3.1 standards. Revised PD and LGD parameter minimum values will be consulted on as part of the the implementation of the Basel 3.1 standards.
- Mortgage exposures classified as "in default" will be excluded from the 10% average minimum risk-weight expectation
Not introducing the minimum risk-weight expectation on individual UK mortgage exposures will mean that the mortgage risk-weights below the proposed value will continue to be permitted. Firms that would have been impacted by the proposal through increases to their mortgage risk-weights, and the corresponding capital requirements, will no longer be impacted by it. As part of the full implementation of the Basel 3.1 standards, PRA plans to carefully consider calibration of the incoming PD and LGD parameter floors for mortgage exposures. These minima were agreed by BCBS, but PRA will consider whether higher levels would be more appropriate in the UK to reflect concerns about low individual mortgage risk-weights. This would allow for a simpler framework than the original proposal consulted on, by having one less floor covering individual mortgage exposures. PS16/21 has been designed in the context of the end of Brexit transition and any references to the EU or EU-derived legislation refer to the version of that legislation that forms part of the retained EU law.
Related Links
Effective Date: January 01, 2022
Keywords: Europe, UK, Banking, Mortgage Risk Weights, PS16/21, CP14/20, SS11/13, Credit Risk, Basel, Regulatory Capital, IRB Approach, Probability of Default, Loss Given Default, 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.
Michael Denton, PhD, PE
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
Previous Article
OSFI Consults on Approach to Address Operational Risk and ResilienceRelated Articles
EBA Publishes Final Regulatory Standards on STS Securitizations
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.
ECB Further Reviews Costs and Benefits Associated with IReF
The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.
EBA Publishes Funding Plans Report, Receives EMAS Certification
The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).
MAS Launches SaaS Solution to Simplify Listed Entity ESG Disclosures
The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.
BCBS to Finalize Crypto Rules by End-2022; US to Propose Basel 3 Rules
The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.
IOSCO Welcomes Work on Sustainability-Related Corporate Reporting
The International Organization of Securities Commissions (IOSCO) welcomed the work of the international audit and assurance standard setters—the International Auditing and Assurance Standards Board (IAASB)
BoE Allows One-Day Delay in Statistical Data Submissions by Banks
The Bank of England (BoE) published a Statistical Notice (2022/18), which informs that due to the Bank Holiday granted for Her Majesty Queen Elizabeth II’s State Funeral on Monday September 19, 2022.
ACPR Amends Reporting Module Timelines Under EBA Framework 3.2
The French Prudential Control and Resolution Authority (ACPR) announced that the European Banking Authority (EBA) has updated its filing rules and the implementation dates for certain modules of the EBA reporting framework 3.2.
ECB Paper Discusses Disclosure of Climate Risks by Credit Agencies
The European Central Bank (ECB) published a paper that examines how credit rating agencies accepted by the Eurosystem, as part of the Eurosystem Credit Assessment Framework (ECAF)
APRA to Modernize Prudential Architecture, Reduces Liquidity Facility
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility (CLF) for authorized deposit-taking entities to ~USD 33 billion on September 01, 2022.
