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.
Comment Due Date: January 30, 2021
Effective Date (Proposed): January 01, 2022
Previous ArticleOSFI Updates Timelines for Implementation of IFRS 17
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.
The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.
The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.
The International Organization of Securities Commissions (IOSCO) welcomed the work of the international audit and assurance standard setters—the International Auditing and Assurance Standards Board (IAASB)
The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).
The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.
The Bank of England (BoE) published a Statistical Notice (2022/18), which informs that due to the Bank Holiday granted for Her Majesty Queen Elizabeth II’s State Funeral on Monday September 19, 2022.
The French Prudential Control and Resolution Authority (ACPR) announced that the European Banking Authority (EBA) has updated its filing rules and the implementation dates for certain modules of the EBA reporting framework 3.2.
The European Central Bank (ECB) published a paper that examines how credit rating agencies accepted by the Eurosystem, as part of the Eurosystem Credit Assessment Framework (ECAF)
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility (CLF) for authorized deposit-taking entities to ~USD 33 billion on September 01, 2022.