PRA Finalizes Approach to Overseas IRB Credit Risk Models

PRA had published CP16/20 in October 2020, in which it had proposed to update the approach to overseas IRB models (overseas model approach) and set out additional criteria for use of the approach. As per the final policy in PS13/21, the following three changes have been made to the draft amendments to SS11/13 in light of the responses received:

• Aggregate amount of risk-weighted assets for credit risk derived using overseas models, and the aggregate amount of exposure value allowed on the overseas models approach, has been increased from 5.0% to 7.5%
• Scope of asset classes eligible for the overseas models approach has been expanded to include corporate small and medium-size enterprises (SMEs)
• Definition of the overseas models’ exposure value measure has been introduced

The first two changes expand the scope of overseas models approach and PRA considers that these changes will reduce the burden of modeling for firms without material impact on the maintenance of strong prudential standards. The third change clarifies the definition of exposure value, which should result in a consistent definition being used. However, PRA considers that these changes are not expected to have a significant cost impact on firms currently allowed to use overseas models in UK consolidated capital requirements and will not materially alter the benefits of the policy or the cost-benefit analysis presented in CP16/20. For the existing overseas IRB models built to non-UK requirements that are not currently used for UK consolidated capital requirements, firms can choose whether to use the overseas model approach. Firms that wish to use the overseas models approach can now submit applications using the updated pro forma and the implementation date for the changes resulting from this PS13/21 begins July 01, 2021. However, firms that do not wish to use the overseas models approach can continue not to use it for UK consolidated capital requirements. For the existing overseas IRB models built to non-UK requirements that are already used for UK consolidated capital requirements, there are three options:

• If these models meet the new PS13/21 criteria, they can continue to be used for UK consolidated capital requirements. Firms should submit a self-attestation that the criteria are met.
• If these models do not meet the overseas models approach criteria from July 01, 2021, firms may need to remediate these models to meet the UK IRB requirements or the criteria for the overseas models approach. PRA expects the models that do not meet the criteria to be remediated by January 01, 2023.
• If firms do not wish to use these models on the overseas models approach, they will need to develop models that meet the UK IRB requirements and discuss this with their supervisor.

Related Links

• Notification
• PS13/21 (PDF)
• SS11/13 (PDF)
• Pro-Forma for Notification (PDF)

Keywords: Europe, UK, Banking, IRB Approach, Credit Risk, Overseas Models Approach, Brexit, PS13/21, SS11/13, CP16/20, Internal Ratings Based, Basel, Regulatory Capital, CRR, PRA