Featured Product

    PRA Proposal on Probability of Default and LGD Estimation

    September 18, 2019

    PRA proposed, via the consultation paper CP21/19, an approach to implementing EBA’s recent regulatory products relating to Probability of Default (PD) estimation, Loss Given Default (LGD) estimation, and the treatment of defaulted exposures in the internal ratings-based (IRB) approach to credit risk. As part of this consultation, PRA is also proposing to update its expectations in the supervisory statement SS11/13 on IRB approaches. The proposals are relevant to UK banks, building societies, and PRA-designated UK investment firms. This consultation closes on December 18, 2019.

    EBA has developed a roadmap of regulatory products with the aim of reducing unwarranted variability in the risk-weighted assets (RWAs) calculated using IRB models of banks. The following three products from the EBA roadmap relate to PD and LGD estimation—

    • Guidelines on PD estimation, LGD estimation, and the treatment of defaulted exposures
    • Final draft regulatory technical standards on the specification of the nature, severity, and duration of an economic downturn, in accordance with Articles 181(3)(a) and 182(4)(a) of Capital Requirements Regulation (EU No 575/2013)
    • Guidelines for the estimation of LGD appropriate for an economic downturn

    CP21/19 sets out the proposed approach of PRA to implementing these three products. The proposals are related to compliance with the EBA roadmap for IRB, cyclicality of downturn LGD estimates, discount rate, use of a component-based modeling approach for downturn LGD, identification of an economic downturn, LGD exposure level floor for residential mortgages, and treatment of defaulted exposures. PRA notes that the regulatory technical standards on economic downturn are, at the time of publication, in draft. CP21/19 (including the proposed changes to SS11/13) assumes that the regulatory technical standards will be made in the same form as the draft. PRA will consider further changes that may be required to SS11/13 if the final regulatory technical standards differ from the current draft. The policy proposals set out in CP21/19 have been designed in the context of the current UK and EU regulatory framework. In the event that UK leaves EU with no implementation period in place, PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2019.

    Earlier, PRA had decided to consult on its implementation of the EBA roadmap in two phases. In the first phase, PRA had consulted on its approach to implementing these products in CP17/18 in July 2018 and published the final approach on the definition of default in the policy statement PS7/19 in March 2019. PRA is now proposing to update the implementation deadlines published in the policy statement PS7/19 on definition of default. The following are the proposed updated deadlines:

    • December 31, 2020—Deadline for IRB firms to implement all changes from the EBA roadmap for residential mortgage portfolios, including all of the definition of default changes. Also, deadline for firms that use the standardized approach for calculating capital requirements for credit risk to apply all changes to the definition of default, with the exception of changes from the guidelines on the application of the definition of default for non-mortgage portfolios.
    • January 01, 2022—Deadline for IRB firms to implement all changes from the EBA roadmap for all other exposure classes. For the avoidance of doubt, this includes the changes to the definition of default for the identification of defaults (except for residential mortgage portfolios, where all changes are subject to the December 31, 2020 deadline). Also, deadline for firms that use the SA for calculating capital requirements for credit risk to apply changes from the guidelines on the application of the definition of default for non-mortgage portfolios.

     

    Related Links

    Comment Due Date: December 18, 2019

    Effective Date: December 31, 2020/January 01, 2022 (Proposed)

    Keywords: Europe, EU, UK, Banking, Credit Risk, Definition of Default, CRR, IRB Approach, LGD Estimation, PS 7/19, CP 21/19, SS 11/13, PD Estimation, Basel III, EBA, PRA

    Featured Experts
    Related Articles
    News

    PRA and FPC Finalize Changes to Leverage Ratio Framework in UK

    The Prudential Regulation Authority (PRA) published the final policy statement PS21/21 on the leverage ratio framework in the UK. PS21/21, which sets out the final policy of both the Financial Policy Committee (FPC) and PRA

    October 08, 2021 WebPage Regulatory News
    News

    CFPB Proposes Rule on Small Business Lending Data Collection

    The Consumer Financial Protection Bureau (CFPB) proposed to amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) under Section 1071 of the Dodd-Frank Act.

    October 08, 2021 WebPage Regulatory News
    News

    PRA Decides to Maintain O-SII Buffers for Another Year

    The Prudential Regulation Authority (PRA) decided to maintain, at the 2019 levels, the buffer rates for the Other Systemically Important Institutions (O-SII) for another year, with no new rates to be set until December 2023.

    October 08, 2021 WebPage Regulatory News
    News

    FSB Report Assesses Implementation of Recommendations on Stablecoins

    The Financial Stability Board (FSB) published a progress report on implementation of its high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements.

    October 07, 2021 WebPage Regulatory News
    News

    APRA Updates Loan Serviceability Expectations for Home Lending

    In a letter to the authorized deposit taking institutions, the Australian Prudential Regulation Authority (APRA) announced an increase in the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.

    October 06, 2021 WebPage Regulatory News
    News

    CPMI and IOSCO Consult on Guidance on Stablecoin Arrangements

    The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are consulting on the preliminary guidance that clarifies that stablecoin arrangements should observe international standards for payment, clearing, and settlement systems.

    October 06, 2021 WebPage Regulatory News
    News

    EBA and EIOPA Set Out Work Priorities for 2022

    The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) have set out their respective work priorities for 2022.

    October 05, 2021 WebPage Regulatory News
    News

    MFSA Issues Reporting Updates and Guidance for Banks

    The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0, in addition to the reporting module on leverage under the common reporting (COREP) framework.

    October 05, 2021 WebPage Regulatory News
    News

    EC Publishes Decision on List of Equivalent Third Countries Under CRR

    The European Commission (EC) published the Implementing Decision 2021/1753 on the equivalence of supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures, in accordance with the Capital Requirements Regulation or CRR (575/2013).

    October 04, 2021 WebPage Regulatory News
    News

    EC Rule on Contractual Recognition of Write-Down and Conversion Powers

    EC published the Implementing Regulation 2021/1751, which lays down implementing technical standards on uniform formats and templates for notification of determination of the impracticability of including contractual recognition of write-down and conversion powers.

    October 04, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7552