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.
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Previous Article
FSB Publishes Update on Work to Address Market FragmentationRelated Articles
PRA to Elaborate on Approach to Transposition of CRD5 by Mid-December
PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.
SRB Sets Out Work Program for 2021-2023
SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.
EIOPA Consults on KPIs on Sustainability for Non-Financial Reporting
EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.
HM Treasury Extends Consultation Dates for FRF and Solvency II Reviews
HM Treasury extended the consultation period on Phase II of the Future Regulatory Framework (FRF) Review, from January 19, 2021 to February 19, 2021.
GHOS Endorses Coordinated Approach to Mitigate COVID Risks for Banks
The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS, endorsed a coordinated approach to mitigate COVID-19 risks to the global banking system.
US Agencies Issue Statement on LIBOR Transition
US Agencies (FDIC, FED, and OCC) issued a joint statement encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, to facilitate an orderly LIBOR transition.
ECB Publishes Guide on Management of Climate and Environmental Risks
ECB finalized guidance on the way it expects banks to prudently manage and transparently disclose climate and other environmental risks under the current prudential rules.
BCBS Amends Capital Treatment of Non-Performing Loan Securitizations
BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks.
PRA Policy on Stressed VaR and RNIV Calculations Under Market Risk
PRA published the policy statement PS23/20 on the calculation of stressed value at risk (sVAR) and risks not in value at risk (RNIV) under the market risk framework.
BoE to Move Statistical Data Collection to BEEDs Portal
BoE announced that the Data and Statistics Division is planning to move collection of statistical data to the BoE Electronic Data Submission (BEEDS) portal.
