Featured Product

    PRA Clarifies Approach to Onshoring of Credit Risk Rules for UK Banks

    February 25, 2021

    In a recent statement, PRA clarified its approach to the application of certain EU regulatory technical standards and EBA guidelines on standardized and internal ratings-based approaches to credit risk, following the end of the Brexit transition. In particular, PRA clarified the implementation approach to EBA guidelines on credit risk mitigation, economic downtown, application of the definition of default, probability of default estimation, loss given default (LGD) estimation, and the treatment of defaulted exposures. PRA also clarified approach with respect to the technical standards on economic downturn, specialized lending exposures, assessment methodology under the internal ratings-based (IRB) approach, and materiality threshold for credit obligations past due.

    With respect to the EU regulatory technical standards, PRA offered clarity on the following:

    • Final draft standards on the specification of the nature, severity, and duration of an economic downturn (EBA/RTS/2018/04)—These standards were not onshored into UK legislation at the end of the transition period, as it did not form part of the retained EU law under the EU (Withdrawal) Act 2018. Despite this, PRA intends to consult in due course on proposals to incorporate the requirements into UK regulation, with the implementation dates as set out in PS11/20.
    • Final draft standards on specialized lending exposures (EBA/RTS/2016/02) and final draft standards on assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the IRB approach (EBA/RTS/2016/03)—PRA notes that these technical standards were not onshored into UK legislation at the end of the transition period and do not apply in the UK. Regardless, PRA will continue to apply high standards in respect of capital requirements for specialized lending exposures and its approach to model assessment.
    • Standards for the materiality threshold for credit obligations past due (Regulation 2018/171)—PRA notes that these standards were onshored at the end of the transition period and continue to apply in the UK. Firms should comply with the relevant PRA Rulebook requirements and associated expectations in the supervisory statement SS11/13 (as set out in the policy statement PS7/19).

    With respect to the EBA guidelines, PRA offered clarity on the following:

    • Guidelines on credit risk mitigation for institutions applying the IRB approach with own estimates of LGD (EBA/GL/2020/05)—These EBA guidelines do not apply in the UK, but PRA will consider the content of these guidelines when it takes decisions related to the credit risk mitigation framework as part of the implementation of Basel 3.1 standards.
    • Guidelines for estimation of LGD appropriate for an economic downturn (EBA/GL/2019/03)—As outlined in PS11/20 on probability of default and LGD estimation and SS11/13 on IRB approach, PRA expects firms to comply with these EBA guidelines.
    • Guidelines on application of the definition of default (EBA/GL/2016/07)—As outlined in PS7/19 on definition of default and in SS11/13, PRA expects firms to comply with these guidelines.
    • Guidelines on PD estimation, LGD estimation, and the treatment of defaulted exposures (EBA/GL/2017/16)—As outlined in PS11/20 and SS11/13, PRA expects firms to comply with these EBA guidelines, with the partial exception of paragraph 135. With respect to this aspect, PRA expects firms to comply with the guidelines in line with paragraph 13.A1 of SS11/13.

    PS11/20 sets an implementation deadline of January 01, 2022, except in respect of the standards on materiality thresholds for firms only using the standardized approach, where the implementation deadline was December 31, 2020. Firms should continue to submit model change applications in line with the submission timings communicated by their supervisors.

     

    Related Links 

    Keywords: Europe, UK, Banking, Credit Risk, Standardized Approach, IRB Approach, Basel, CRD5, Regulatory Capital, Specialized Lending, EBA, PRA

    Featured Experts
    Related Articles
    News

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News
    News

    FSB and NGFS Publish Initial Findings from Climate Scenario Analyses

    The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.

    November 15, 2022 WebPage Regulatory News
    News

    FSB Issues Reports on NBFI and Liquidity in Government Bonds

    The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system.

    November 14, 2022 WebPage Regulatory News
    News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News
    News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News
    News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News
    News

    EU Finalizes Rules Under Crowdfunding Service Providers Regulation

    The European Union has finalized and published, in the Official Journal of the European Union, a set of 13 Delegated and Implementing Regulations applicable to the European crowdfunding service providers.

    November 08, 2022 WebPage Regulatory News
    News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News
    News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    News

    BIS Hub and Central Banks Conduct CBDC and DeFI Pilots

    The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.

    November 03, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8596