PRA and Firms Discuss IRB Capital Calculations for Mortgage Exposures
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.
Related Links
Keywords: Europe, UK, Banking, Regulatory Capital, Probability of Default, Loss Given Default, Mortgage Exposures, IRB Approach, Credit Risk, Basel, PRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
CBE Issues Circular on Revision of Models Used in Calculation of ECLRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
