PRA Amends Policy on Internal and Standardized Credit Risk Approaches
PRA finalized policy statements PS11/20 and PS12/20, also updating the associated supervisory statements SS10/13 on the standardized approach to credit risk and SS11/13 on the internal ratings-based approaches. PS11/20 finalized the proposals (in CP21/19) to implement the regulatory products of EBA that relate to the estimations of probability of default (PD) and loss given default (LGD). PS12/20 finalized the proposals (in CP25/19) on retirement interest-only mortgages. PS11/20 and PS12/20 will take effect on January 01, 2022.
PS11/20 finalized policy related to PD and LGD estimation and updated SS11/13 on internal ratings-based approaches. SS11/13 covers the principal topics of corporate governance, permanent partial use and sequential implementation, overall requirements for estimation, definition of default, PD, LGD, exposure at default, validation, income-producing real estate portfolios, and notification and approval of changes to approved models. PS11/20 is relevant to UK banks, building societies, and PRA-designated UK investment firms. After considering the comments received, PRA amended and finalized the draft policy in CP21/19 by
- Extending the implementation deadlines for the EBA roadmap and the mortgage hybrid approach, including removing the transitional period outlined in paragraph 2.8 of PS7/19
- Amending the approach to discounting cured exposures
- Accepting temporary divergence between accounting impairment models and approved internal ratings-based models for defaulted exposures, due to the need to make timely changes to impairment models
- Clarifying the use of Sterling Overnight Index Average (SONIA), including for defaults that occurred before the first date SONIA is available from BoE
The finalized PS12/20 addresses potential inconsistencies in practices across firms in relation to the capital treatment of retirement interest-only mortgages. The final policy is intended to facilitate consistent and prudent treatment across firms in their treatment of interest-only and retirement interest-only mortgages. PS12/20 updated SS11/13 on internal ratings-based approaches as well as SS10/13 on the standardized approach to credit risk. PS12/20 is relevant to all banks, building societies and PRA-authorized investment firms offering retirement interest-only (RIO) mortgages. It is also relevant to firms that have offered retirement interest-only mortgages in the past or may do so in the future. PS12/20 should be read in conjunction with the PS11/20 that covers the policy on PD and LGD estimation, among other aspects.
The finalized policies have been designed in the context of the withdrawal of UK from EU and entry into the transition period, during which time the UK remains subject to European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with the European Union take effect. However, PRA assessed that PS12/20 and the updated parts of SS11/13 would not need to be amended under the EU (Withdrawal) Act 2018.
Related Links
Effective Date: January 01, 2022
Keywords: Europe, UK, Banking, Credit Risk, Probability of Default, Loss Given Default, IRB Approach, Basel III, PS11/20, SS11/13, PS12/20, SS10/13, Standardized Approach, CRR, Interest-only Mortgages, PRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
ISDA on Results of Consultation on Pre-cessation Fallbacks for LIBORRelated Articles
EC Adopts Financial Reporting Changes Arising from Benchmark Reforms
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HMT Updates List of Post-Brexit Equivalence Decisions in UK
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
EBA Issues Erratum for Technical Package on Reporting Framework 3.0
EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.
APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.
EBA Publishes Risk Dashboard for Third Quarter of 2020
EBA published the quarterly risk dashboard, along with the results of the Risk Assessment Questionnaire survey among 60 banks and 15 market analysts.
ECB Analysis Shows Privacy as Biggest Concern in Use of Digital Euro
ECB concluded the public consultation on the introduction of a digital euro in EU.
ECB Finalizes Guide on Supervisory Approach to Bank Consolidation
ECB published a guide that sets out the supervisory approach to consolidation in the banking sector.
SRB Chair Outlines Work Priorities for 2021
The SRB Chair Elke König published an article setting out work priorities for 2021.
FDIC Selects Companies to Compete in Final Phase of Tech Sprint
FDIC has selected 11 technology companies—including BearingPoint, Fed Reporter, Inc, and S&P Global Market Intelligence, LLC—for inclusion in the third and final phase of the rapid prototyping competition.
