PRA Amends Policy on Internal and Standardized Credit Risk Approaches
PRA finalized policy statements PS11/20 and PS12/20, also updating the associated supervisory statements SS10/13 on the standardized approach to credit risk and SS11/13 on the internal ratings-based approaches. PS11/20 finalized the proposals (in CP21/19) to implement the regulatory products of EBA that relate to the estimations of probability of default (PD) and loss given default (LGD). PS12/20 finalized the proposals (in CP25/19) on retirement interest-only mortgages. PS11/20 and PS12/20 will take effect on January 01, 2022.
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
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
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.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
ISDA on Results of Consultation on Pre-cessation Fallbacks for LIBORRelated Articles
BIS Paper Studies Impact of Fintech Lending on Small Businesses in US
The Bank for International Settlements (BIS) published a paper that studies impact of fintech lending on credit access for small businesses in U.S.
UK Regulators Issue CRR Changes and Stress Test Scenarios for Banks
The Prudential Regulation Authority (PRA) issued the policy statement PS8/22 to amend the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook and update the supervisory statement SS7/13 titled "Definition of capital (CRR firms).
EBA Launches EU-Wide Transparency Exercise in 2022
The European Banking Authority (EBA) launched the EU-wide transparency exercise for 2022, with results of the exercise expected to be published at the beginning of December, along with the annual Risk Assessment Report.
SRB on CRR Quick-Fix to Policy for Multiple Point of Entry Banks
The Single Resolution Board (SRB) welcomed the adoption of the review of the Capital Requirements Regulation, or CRR, also known as the "CRR quick-fix."
EC Rule Lists Advanced Economies for Market Risk Capital Calculations
The European Commission (EC) recently adopted the Delegated Regulation 2022/1622, which sets out the regulatory technical standards to specify the countries that constitute advanced economies for the purpose of specifying risk-weights for the sensitivities to equity.
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.
