PRA held a virtual meeting with firms that are using an internal ratings-based (IRB) model to calculate capital requirements for residential mortgage exposures. The meeting was intended to enhance dialog between PRA and firms before model submissions. At the event, PRA presented on the most relevant cross-firm modeling issues and further discussed its expectations regarding the development of hybrid probability of default (PD) and loss given default (LGD) models.
PRA was expected to provide further clarifications on common cross-firm modeling issues while firms were expected to highlight risks and challenges to internal model governance, implementation timelines, and submission to PRA. PRA provided an overview of its expectations regarding the development of hybrid PD models, highlighting the most common modeling issues in the areas of calibration, measurement of cyclicality, modeling of sub-portfolios, and margins of conservatism. PRA also outlined its expectations on the development of LGD models, highlighting the most common modeling issues with respect to downturn periods, probability of possession given default, use of rating scales, and treatment of unresolved exposures.
This meeting followed the publication of the policy statements PS11/20 titled "Credit risk: Probability of default and loss given default estimation" and PS12/20, which addresses potential inconsistencies in practices across firms in relation to the capital treatment of retirement interest-only mortgages. PS11/20 finalized the 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.
Keywords: Europe, UK, Banking, Regulatory Capital, Probability of Default, Loss Given Default, Mortgage Exposures, IRB Approach, Credit Risk, Basel, PRA
Previous ArticleFSB Publishes Update on Work to Address Market Fragmentation
APRA finalized the reporting standard ARS 115.0 on capital adequacy with respect to the standardized measurement approach to operational risk for authorized deposit-taking institutions in Australia.
EBA is consulting on the implementing technical standards for Pillar 3 disclosures on environmental, social, and governance (ESG) risks, as set out in requirements under Article 449a of the Capital Requirements Regulation (CRR).
ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting
EU published Directive 2021/338, which amends the Markets in Financial Instruments Directive (MiFID) II and the Capital Requirements Directives (CRD 4 and 5) to facilitate recovery from the COVID-19 crisis.
The EBA Single Rulebook question and answer (Q&A) tool updates for this month include answers to ten questions.
ESMA updated the set of questions and answers (Q&A), along with the reporting instructions and an XML schema for the templates set out in the technical standards on disclosure requirements, under the Securitization Regulation.
EU published Regulation 2021/337, which amends the Transparency Directive (2004/109/EC), regarding the use of the single electronic reporting format for annual financial reports.
The Standing Committee of the European Free Trade Association (EFTA) recommended that a systemic risk buffer level of 4.5% for domestic exposures can be considered appropriate for addressing the identified systemic risks to the stability of the financial system in Norway.
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 a recently published letter addressed to the G20 finance ministers and central bank governors, the FSB Chair Randal K. Quarles has set out the key FSB priorities for 2021.