Featured Product

    PRA Proposal on Probability of Default and LGD Estimation

    September 18, 2019

    PRA proposed, via the consultation paper CP21/19, an approach to implementing EBA’s recent regulatory products relating to Probability of Default (PD) estimation, Loss Given Default (LGD) estimation, and the treatment of defaulted exposures in the internal ratings-based (IRB) approach to credit risk. As part of this consultation, PRA is also proposing to update its expectations in the supervisory statement SS11/13 on IRB approaches. The proposals are relevant to UK banks, building societies, and PRA-designated UK investment firms. This consultation closes on December 18, 2019.

    EBA has developed a roadmap of regulatory products with the aim of reducing unwarranted variability in the risk-weighted assets (RWAs) calculated using IRB models of banks. The following three products from the EBA roadmap relate to PD and LGD estimation—

    • Guidelines on PD estimation, LGD estimation, and the treatment of defaulted exposures
    • Final draft regulatory technical standards on the specification of the nature, severity, and duration of an economic downturn, in accordance with Articles 181(3)(a) and 182(4)(a) of Capital Requirements Regulation (EU No 575/2013)
    • Guidelines for the estimation of LGD appropriate for an economic downturn

    CP21/19 sets out the proposed approach of PRA to implementing these three products. The proposals are related to compliance with the EBA roadmap for IRB, cyclicality of downturn LGD estimates, discount rate, use of a component-based modeling approach for downturn LGD, identification of an economic downturn, LGD exposure level floor for residential mortgages, and treatment of defaulted exposures. PRA notes that the regulatory technical standards on economic downturn are, at the time of publication, in draft. CP21/19 (including the proposed changes to SS11/13) assumes that the regulatory technical standards will be made in the same form as the draft. PRA will consider further changes that may be required to SS11/13 if the final regulatory technical standards differ from the current draft. The policy proposals set out in CP21/19 have been designed in the context of the current UK and EU regulatory framework. In the event that UK leaves EU with no implementation period in place, PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2019.

    Earlier, PRA had decided to consult on its implementation of the EBA roadmap in two phases. In the first phase, PRA had consulted on its approach to implementing these products in CP17/18 in July 2018 and published the final approach on the definition of default in the policy statement PS7/19 in March 2019. PRA is now proposing to update the implementation deadlines published in the policy statement PS7/19 on definition of default. The following are the proposed updated deadlines:

    • December 31, 2020—Deadline for IRB firms to implement all changes from the EBA roadmap for residential mortgage portfolios, including all of the definition of default changes. Also, deadline for firms that use the standardized approach for calculating capital requirements for credit risk to apply all changes to the definition of default, with the exception of changes from the guidelines on the application of the definition of default for non-mortgage portfolios.
    • January 01, 2022—Deadline for IRB firms to implement all changes from the EBA roadmap for all other exposure classes. For the avoidance of doubt, this includes the changes to the definition of default for the identification of defaults (except for residential mortgage portfolios, where all changes are subject to the December 31, 2020 deadline). Also, deadline for firms that use the SA for calculating capital requirements for credit risk to apply changes from the guidelines on the application of the definition of default for non-mortgage portfolios.

     

    Related Links

    Comment Due Date: December 18, 2019

    Effective Date: December 31, 2020/January 01, 2022 (Proposed)

    Keywords: Europe, EU, UK, Banking, Credit Risk, Definition of Default, CRR, IRB Approach, LGD Estimation, PS 7/19, CP 21/19, SS 11/13, PD Estimation, Basel III, EBA, PRA

    Featured Experts
    Related Articles
    News

    FSB Sets Out Effective Practices for Cyber Incident Recovery

    FSB finalized the toolkit of effective practices to assist financial institutions in their cyber incident response and recovery activities.

    October 19, 2020 WebPage Regulatory News
    News

    HKMA Urges Early Action for Adherence to IBOR Fallbacks Protocol

    HKMA urged authorized institutions to take early action to adhere to the IBOR Fallbacks Protocol, which ISDA is expected to publish soon.

    October 16, 2020 WebPage Regulatory News
    News

    FSB Sets Out Roadmap for Transition to Alternative Reference Rates

    FSB published a global transition roadmap for London Inter-bank Offered Rate (LIBOR).

    October 16, 2020 WebPage Regulatory News
    News

    HM Treasury Publishes Response to Proposal on BRRD2 Transposition

    HM Treasury published a document that summarizes the responses received from a consultation on the approach of UK to transposition of the revised Bank Resolution and Recovery Directive (BRRD2).

    October 15, 2020 WebPage Regulatory News
    News

    HM Treasury Publishes Response to Proposal on CRD5 Transposition

    HM Treasury published the government response to the feedback received on the consultation for updating the prudential regime of UK before the end of the Brexit transition period.

    October 15, 2020 WebPage Regulatory News
    News

    BoE Publishes Reporting Schedule for Statistical Returns

    In a recent statistical notice, BoE announced publication of the reporting schedule for statistical returns for 2021.

    October 15, 2020 WebPage Regulatory News
    News

    EC Welcomes Declaration by Member States on EU Cloud Federation

    EC welcomed the joint declaration by 25 EU member states on building the next generation of cloud in Europe.

    October 15, 2020 WebPage Regulatory News
    News

    MAS Amends Notice on Issuance of Covered Bonds by Banks in Singapore

    MAS published amendments to Notice 648 on the issuance of covered bonds by banks incorporated in Singapore.

    October 15, 2020 WebPage Regulatory News
    News

    FDIC Selects Technology Companies for Rapid Prototyping Competition

    FDIC has selected 14 technology companies—including Accenture Federal Services, LLC, Fed Reporter, Inc, and S&P Global Market Intelligence, LLC—for inclusion in the next phase of the rapid prototyping competition.

    October 15, 2020 WebPage Regulatory News
    News

    GLEIF Defines New Validation Agent Role for Financial Institutions

    GLEIF announced that financial institutions worldwide can realize a variety of cost, efficiency, and customer experience benefits by assuming a new “validation agent” role within the Global Legal Entity Identifier (LEI) System.

    October 15, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5980