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.
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
EIOPA submitted—to the European Parliament, the Council of the European Union, and EC—its 2020, fifth, and last annual report on long-term guarantee measures and measures on equity risk.
The BIS Innovation Hub Swiss Centre, SNB, and the financial infrastructure operator SIX announced the successful completion of a joint proof-of-concept (PoC) experiment as part of the Project Helvetia.
EBA published the final draft regulatory technical standards for calculation of own funds requirements for market risk, under the standardized and internal model approaches of the Fundamental Review of the Trading Book (FRTB) framework.
EIOPA published discussion paper on a methodology for the potential inclusion of climate change in the Solvency II (sometimes also written as SII) standard formula when calculating natural catastrophe underwriting risk.
EU published, in the Official Journal of the European Union, corrigenda to the Directive and the Regulation on the prudential requirements and supervision of investment firms.
MAS proposed amendments to certain regulations, notices, and guidelines arising from the Banking (Amendment) Act 2020.
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.
RBNZ launched consultations on the scope of the Insurance Prudential Supervision Act (IPSA) 2010 and on the associated Insurance Solvency Standards.
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 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.