PRA and Firms Discuss IRB Capital Calculations for Mortgage Exposures
PRA held a virtual meeting with firms that are using an internal ratings-based (IRB) model to calculate capital requirements for residential mortgage exposures. The meeting was intended to enhance dialog between PRA and firms before model submissions. At the event, PRA presented on the most relevant cross-firm modeling issues and further discussed its expectations regarding the development of hybrid probability of default (PD) and loss given default (LGD) models.
PRA was expected to provide further clarifications on common cross-firm modeling issues while firms were expected to highlight risks and challenges to internal model governance, implementation timelines, and submission to PRA. PRA provided an overview of its expectations regarding the development of hybrid PD models, highlighting the most common modeling issues in the areas of calibration, measurement of cyclicality, modeling of sub-portfolios, and margins of conservatism. PRA also outlined its expectations on the development of LGD models, highlighting the most common modeling issues with respect to downturn periods, probability of possession given default, use of rating scales, and treatment of unresolved exposures.
This meeting followed the publication of the policy statements PS11/20 titled "Credit risk: Probability of default and loss given default estimation" and PS12/20, which addresses potential inconsistencies in practices across firms in relation to the capital treatment of retirement interest-only mortgages. PS11/20 finalized the 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.
Related Links
Keywords: Europe, UK, Banking, Regulatory Capital, Probability of Default, Loss Given Default, Mortgage Exposures, IRB Approach, Credit Risk, Basel, 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
FSB Publishes Update on Work to Address Market FragmentationRelated Articles
EBA Publishes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.
EU Agencies Update LCR Rule and Macro-Prudential Policy Recommendation
The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).
OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
EBA Proposes Standards to Support Secondary NPL Markets
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
EBA Issues Standards for Crowdfunding Service Providers Under ECSPR
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.
EU to Amend Credit Risk Adjustment Rules; ESAs Submit Queries on SFDR
The European Council published a draft Commission Delegated Regulation to amend the regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Securities and Markets Authority (ESMA) published a paper that examines the systemic risk posed by increasing use of cloud services, along with the potential policy options to mitigate this risk.
MAS Amends Notice 635 and Issues Second Proposal on Green Taxonomy
The Monetary Authority of Singapore (MAS) published amendments to Notice 635, which sets out requirements that a bank in Singapore has to comply with when granting an unsecured non-card credit facility to individuals.
EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.
