UK Prudential Regulator Consults on Credit Risk
09/18/2019The U.K. Prudential Regulation Authority has launched a consultation on its approach to implementing the European Banking Authority's Technical Standards and Guidelines on Probability of Default estimation, Loss Given Default estimation and the treatment of defaulted exposures in the Internal Ratings Based approach to credit risk. The consultation is relevant to U.K. banks, building societies and PRA-designated U.K. investment firms. Responses to the consultation need to be submitted by December 18, 2019.
The EBA developed a roadmap in 2016 to address concerns about the variability of own funds requirements arising from the internal models that firms use to calculate their minimum credit risk capital requirements under the Capital Requirements Regulation. The PRA has adopted a two-stage approach to implementing the EBA's roadmap. The first stage concerned the definition of default and the PRA published a revised Supervisory Statement and revised rules on March 6, 2019. The second stage is on PD and LGD estimation.
Three of the products from the EBA roadmap relate to PD and LGD estimation:
- the Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures;
- the final draft Regulatory Technical Standards on the specification of the nature, severity and duration of an economic downturn; and
- the Guidelines for the estimation of LGD appropriate for an economic downturn.
The PRA intends to update its Supervisory Statement, "Internal Ratings Based (IRB) approaches" (SS 11/13), to implement these three products. If the final RTS differ materially from the final draft RTS, the PRA will consider further changes to the Supervisory Statement.
In line with the revised implementation timetable for the EBA's roadmap, as set out in the EBA's progress report published on July 8, 2019, the PRA is proposing the following compliance deadlines. Firms should note that these revise the timelines published by the PRA in its Policy Statement on the definition of default.
- December 31, 2020:
- Implementation by IRB firms of all changes from the EBA roadmap for residential mortgage portfolios, including all of the definition of default changes.
- Application of 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, for firms using the standardized approach for calculating capital requirements for credit risk.
- January 1, 2022:
- Implementation by IRB firms of all changes from the EBA roadmap for all other exposure classes.
- Application of the changes from the Guidelines on the application of the definition of default for non-mortgage portfolios for firms that use the standardized approach for calculating capital requirements for credit risk.
The PRA considers that if the U.K. leaves the EU without an implementation period (i.e. a no-deal Brexit), the Supervisory Statement would not need amending.
View the consultation paper.
View details of the EBA Guidelines on probability of default.
View details of the RTS on economic downturn.
View details of the EBA Guidelines on the estimation of LGD for an economic downturn.
View details of the PRA's Policy Statement on implementing the EBA's products on the definition of default.
View details of the EBA's progress report on the 2016 roadmap.
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