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.
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
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