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Home > Prudential Regulation Authority > Internal Ratings Based (IRB) approach: clarifying PRA expectations – PS23/17
 

Internal Ratings Based (IRB) approach: clarifying PRA expectations – PS23/17

03 October 2017

​Overview

This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to Consultation Paper (CP) 5/17 ‘Internal Ratings Based (IRB) approach: clarifying PRA expectations’.  It contains the final amendments to Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’.

This PS is relevant to UK banks, building societies, and PRA-designated investment firms.

The proposals in CP5/17 sought to clarify PRA expectations for firms applying for IRB model approval as to:

  • how they can demonstrate that they meet the requirements of the Capital Requirements Regulation (CRR)  on ‘prior experience’ of using IRB approaches; and
  • on the use of external data to supplement internal data for estimating Probability of Default (PD) and Loss Given Default (LGD) for residential mortgages.

CP5/17 also proposed to set two reference points for estimating Probability of Possession Given Default (PPGD) for residential mortgages for firms that lack significant possession data.

Chapter 2 of this PS outlines the PRA’s feedback to the responses received during the consultation. The Appendix contains the updated SS11/13.

Having considered respondents’ comments, the amendments to SS11/13 are as proposed in CP5/17 with two additional clarifications that are outlined in paragraphs 2.5 and 2.9 of this PS. These clarifications relate to the calibration of margins of conservatism in PD and LGD estimation and to the monitoring of rating systems. The PRA does not consider these clarifications to have any additional material impact on firms, and so has not provided an updated cost-benefit analysis.

Implementation

The amendments to SS11/13 apply with immediate effect. They will apply to any IRB model application received after publication of the updated SS11/13, and also to IRB applications that have been received by the PRA prior to that date but for which a PRA approval or rejection decision has not yet been taken.

Policy statement

Internal Ratings Based (IRB) approach: clarifying PRA expectations – PS23/17

Appendix
 


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