PRA Proposes to Amend SS11/13 on Internal Ratings-Based Approaches
PRA is proposing, via the consultation paper CP14/20, to introduce two complementary expectations on the level of mortgage risk-weights in UK for banks applying the internal ratings-based approaches. PRA considers that models delivering risk-weights below the newly proposed expectations are likely to be materially deficient. The comment period on CP14/20 ends on January 30, 2021. The finalization of this proposal would result in changes to the Supervisory Statement SS11/13 on internal ratings-based approaches. PRA proposes that the final policy resulting from CP14/20 to take effect from January 01, 2022.
The purpose of these proposals is to address the prudential risks stemming from inappropriately low internal ratings-based UK mortgage risk-weights. In the consultation paper, PRA sets out its expectations that it considers models delivering risk-weights below the following levels are likely to be materially deficient in risk capture:
- A risk-weight of at least 7% for each individual UK residential mortgage exposure
- An exposure-weighted average risk-weight of at least 10% for all UK residential mortgage exposures to which a firm applies the internal ratings-based approach
Risk-weighting is a key part of the capital framework in UK. A number of typically larger UK firms use internal ratings-based models when calculating their risk-weights as inputs to risk-weighted capital requirements and ratios. The average internal ratings-based UK mortgage risk-weight is just under 10%, having fallen from c.13% in 2014. These are historically low average internal ratings-based UK risk-weights. This average conceals significant firm variation in these risk weights, which range from c.4% to c. 17%. Even for the same loan quality, as measured by a given loan-to-value (LTV) bucket, different models currently give very different risk-weights. By comparison, the lowest standardized approach UK mortgage risk-weight is 35%, while the EU average internal ratings-based mortgage risk-weight is c. 13%. The proposed changes would result in narrowing of differentials between the internal ratings-based and standardized approach UK mortgage risk-weights.
Both proposals would apply at all levels of consolidation and cover all UK residential mortgage exposures. CP14/20 is relevant to authorized UK banks, building societies, and ring-fenced banks holding internal ratings-based model permissions. It may also be of interest to other firms, including those considering applying for internal ratings-based model permission. Other countries, including Norway, Finland, Sweden, Belgium, and the Netherlands, have also introduced measures to address the low internal ratings-based mortgage risk-weights.
Related Links
Comment Due Date: January 30, 2021
Effective Date (Proposed): January 01, 2022
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
ECB Publishes Eleventh Issue of the Macroprudential BulletinNext Article
FED Proposes to Revise and Extend FR Y-9 ReportsRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.