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    PRA Issues PS7/19 Related to Definition of Default Under Credit Risk

    March 06, 2019

    PRA published a policy statement (PS7/19) that provides feedback to the responses to the consultation paper (CP17/18) on approach to implementing EBA’s recent regulatory products related to the definition of default in the Capital Requirements Regulation or CRR (575/2013). PS7/19 is relevant to UK banks, building societies, and PRA-designated investment firms.

    PRA received ten responses to CP17/18. Respondents generally supported the PRA proposals. Some consultation responses outlined specific concerns and requests for clarification. The areas in which PRA has amended or clarified the proposals have been detailed in Chapter 2 of the policy statement. PS7/19 contains the final policy of PRA, including:

    • An amendment to the Credit Risk Part of the PRA Rulebook to set thresholds for determining whether a credit obligation is material for the purpose of CRR’s definition of default (Appendix 1). This instrument comes into force on December 31, 2020.
    • An update to the PRA’s expectations in supervisory statement (SS11/13) on internal ratings-based (IRB) approaches to implement EBA’s regulatory products that relate to the definition of default (Appendix 2). PRA rule and updates to SS11/13 apply from December 31, 2020, unless a firm attains supervisory approval to extend this application date. 

    EBA has developed a roadmap of regulatory products to reduce unwarranted variability in the risk-weighted assets across banks for credit risk. Two of the products from the EBA roadmap relate to the definition of default: the regulatory technical standards for the materiality threshold for credit obligations past due and the guidelines on the application of the definition of default. PRA intends to publish a further consultation paper on PRA’s proposed implementation of the remaining aspects of EBA roadmap: the guidelines on probability of default (PD) estimation, loss given default (LGD) estimation, and the treatment of defaulted exposures; the regulatory technical standards that specify the nature, severity, and duration of an economic downturn; and the guidelines for the estimation of LGD appropriate for an economic downturn. The consultation paper will be published after EBA has finalized the relevant regulatory products.

     

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    Effective Date: December 31, 2020

    Keywords: Europe, UK, Banking, Credit Risk, Credit Obligations, Materiality Threshold, Definition of Default, PS7/19, CRR, IRB Approach, PRA

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