July 27, 2018

PRA published a consultation paper (CP17/18) that sets out its proposed approach to implementing EBA’s recent regulatory products relating to the definition of default in the Capital Requirements Regulation or CRR (575/2013). This consultation closes on October 29, 2018.

EBA has developed a roadmap of regulatory products to reduce unwarranted variability in the risk-weighted assets (RWAs) calculated using banks’ internal ratings-based (IRB) models. Two of the products from the EBA roadmap relate to the definition of default: the regulatory technical standards for the materiality threshold for credit obligations past due and the guidelines on the application of the definition of default. This consultation paper sets out the proposed approach to implementing these products. Through this consultation PRA proposes to update the expectations in the Supervisory Statement SS11/13 titled “Internal Ratings Based (IRB) approaches” to implement the EBA’s regulatory products that relate to the definition of default (Appendix 1). PRA also proposes to amend the Credit Risk Part of the PRA Rulebook to set thresholds for determining whether a credit obligation is material for the purpose of the CRR’s definition of default (Appendix 2). The proposals are relevant to UK banks, building societies, and PRA-designated UK investment firms.

In accordance with the EBA Opinion on the implementation of the regulatory review of the IRB Approach, EBA roadmap should be implemented by December 31, 2020. The proposed implementation date for all of the proposals in this consultation is also December 31, 2020. PRA also intends to publish a second consultation on its proposed implementation of the remaining aspects of the EBA roadmap: the Guidelines on probability of default (PD) estimation, loss given default (LGD) estimation, and the treatment of defaulted exposures; along with the regulatory technical standards on specification of the nature, severity, and duration of an economic downturn. The second consultation paper will be published after the EBA has finalized the relevant regulatory products.

 

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Comment Due Date: October 29, 2018

Keywords: Europe, UK, Banking, Credit Risk, Credit Obligations, Materiality Threshold, Definition of Default, CP17/18, CRR, PRA

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