PRA Amends Policy on Internal and Standardized Credit Risk Approaches

PS11/20 finalized policy related to PD and LGD estimation and updated SS11/13 on internal ratings-based approaches. SS11/13 covers the principal topics of corporate governance, permanent partial use and sequential implementation, overall requirements for estimation, definition of default, PD, LGD, exposure at default, validation, income-producing real estate portfolios, and notification and approval of changes to approved models. PS11/20 is relevant to UK banks, building societies, and PRA-designated UK investment firms. After considering the comments received, PRA amended and finalized the draft policy in CP21/19 by 

• Extending the implementation deadlines for the EBA roadmap and the mortgage hybrid approach, including removing the transitional period outlined in paragraph 2.8 of PS7/19
• Amending the approach to discounting cured exposures
• Accepting temporary divergence between accounting impairment models and approved internal ratings-based models for defaulted exposures, due to the need to make timely changes to impairment models
• Clarifying the use of Sterling Overnight Index Average (SONIA), including for defaults that occurred before the first date SONIA is available from BoE

The finalized PS12/20 addresses potential inconsistencies in practices across firms in relation to the capital treatment of retirement interest-only mortgages. The final policy is intended to facilitate consistent and prudent treatment across firms in their treatment of interest-only and retirement interest-only mortgages. PS12/20 updated SS11/13 on internal ratings-based approaches as well as SS10/13 on the standardized approach to credit risk. PS12/20 is relevant to all banks, building societies and PRA-authorized investment firms offering retirement interest-only (RIO) mortgages. It is also relevant to firms that have offered retirement interest-only mortgages in the past or may do so in the future. PS12/20 should be read in conjunction with the PS11/20 that covers the policy on PD and LGD estimation, among other aspects.

The finalized policies have been designed in the context of the withdrawal of UK from EU and entry into the transition period, during which time the UK remains subject to European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with the European Union take effect. However, PRA assessed that PS12/20 and the updated parts of SS11/13 would not need to be amended under the EU (Withdrawal) Act 2018. 

Related Links

• PS11/20
• PS12/20
• SS10/13
• SS11/13

Effective Date: January 01, 2022

Keywords: Europe, UK, Banking, Credit Risk, Probability of Default, Loss Given Default, IRB Approach, Basel III, PS11/20, SS11/13, PS12/20, SS10/13, Standardized Approach, CRR, Interest-only Mortgages, PRA