PRA Proposes to Amend SS11/13 on Internal Ratings-Based Approaches
PRA is proposing, via the consultation paper CP14/20, to introduce two complementary expectations on the level of mortgage risk-weights in UK for banks applying the internal ratings-based approaches. PRA considers that models delivering risk-weights below the newly proposed expectations are likely to be materially deficient. The comment period on CP14/20 ends on January 30, 2021. The finalization of this proposal would result in changes to the Supervisory Statement SS11/13 on internal ratings-based approaches. PRA proposes that the final policy resulting from CP14/20 to take effect from January 01, 2022.
The purpose of these proposals is to address the prudential risks stemming from inappropriately low internal ratings-based UK mortgage risk-weights. In the consultation paper, PRA sets out its expectations that it considers models delivering risk-weights below the following levels are likely to be materially deficient in risk capture:
- A risk-weight of at least 7% for each individual UK residential mortgage exposure
- An exposure-weighted average risk-weight of at least 10% for all UK residential mortgage exposures to which a firm applies the internal ratings-based approach
Risk-weighting is a key part of the capital framework in UK. A number of typically larger UK firms use internal ratings-based models when calculating their risk-weights as inputs to risk-weighted capital requirements and ratios. The average internal ratings-based UK mortgage risk-weight is just under 10%, having fallen from c.13% in 2014. These are historically low average internal ratings-based UK risk-weights. This average conceals significant firm variation in these risk weights, which range from c.4% to c. 17%. Even for the same loan quality, as measured by a given loan-to-value (LTV) bucket, different models currently give very different risk-weights. By comparison, the lowest standardized approach UK mortgage risk-weight is 35%, while the EU average internal ratings-based mortgage risk-weight is c. 13%. The proposed changes would result in narrowing of differentials between the internal ratings-based and standardized approach UK mortgage risk-weights.
Both proposals would apply at all levels of consolidation and cover all UK residential mortgage exposures. CP14/20 is relevant to authorized UK banks, building societies, and ring-fenced banks holding internal ratings-based model permissions. It may also be of interest to other firms, including those considering applying for internal ratings-based model permission. Other countries, including Norway, Finland, Sweden, Belgium, and the Netherlands, have also introduced measures to address the low internal ratings-based mortgage risk-weights.
Related Links
Comment Due Date: January 30, 2021
Effective Date (Proposed): January 01, 2022
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
OSFI Updates Timelines for Implementation of IFRS 17Related Articles
APRA Decides to Standardize Submission Date for Quarterly Reporting
APRA announced the standardization of quarterly reporting due dates for authorized deposit-taking institutions.
Bundesbank Publishes Supporting Documentation for Reporting by Banks
Bundesbank published a list of "EntryPoints" that are accepted in its reporting system; the list provides taxonomy version and name of the module against each EntryPoint.
ECB Working Group Publishes Recommendations on EURIBOR Fallbacks
The private sector working group of ECB on euro risk-free rates published the recommendations to address events that would trigger fallbacks in the Euro Interbank Offered Rate (EURIBOR)-related contracts, along with the €STR-based EURIBOR fallback rates (rates that could be used if a fallback is triggered).
EBA Publishes Phase 1 of Reporting Framework 3.1
EBA published the phase 1 of its reporting framework 3.1, with the technical package covering the new reporting requirements for investment firms (under the implementing technical standards on investment firms reporting).
APRA to Finalize Capital Adequacy Standard Revisions by January 2022
Asia Pacific Australia Banking APS 111 Capital Adequacy Regulatory Capital Basel RBNZ APRA
ESMA Issues Guidelines on Outsourcing to Cloud Service Providers
ESMA published the final guidelines on outsourcing to cloud service providers.
EBA Publishes Data on Deposit Guarantee Schemes
EBA published annual data for two key concepts and indicators in the Deposit Guarantee Schemes (DGS) Directive—available financial means and covered deposits.
OSFI Sets Out Plan for Future Guidance on Managing Technology Risk
OSFI has set out the schedule for release of draft guidance on the management of technology risks by federally regulated financial institutions and private pension plans.
MAS Updates Housing Loan Rules, Proposes Corporate Governance Guidance
MAS updated rules for new housing loans by banks and finance companies.
HKMA Publishes Guideline on Sustainable Finance Grant Scheme
HKMA published a statement on the 100% Personal Loan Guarantee Scheme and a guideline on the Green and Sustainable Finance Grant Scheme (GSF Grant Scheme) as announced in the 2021-22 Budget.
