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    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.

     

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

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