Credit risk: internal ratings based approaches

Supervisory Statement 1/13
Published on 02 August 2013

Background

On 2 August 2013, the Prudential Regulation Authority (PRA) issued a feedback statement on its consultation paper CP4/13 on the consolidation of legacy Financial Services Authority (FSA) material relating to internal ratings based (IRB) approaches into a Supervisory Statement. The consultation began on 28 March 2013 and closed on 29 April 2013. 

PDFSupervisory Statement 1/13
 
This Supervisory Statement has been superseded by SS11/13 published on 19 December 2013.

Summary of the key issues covered by the feedback statement

The feedback statement confirms the approach the PRA will take to consolidating FSA non-Handbook material communicated to firms on IRB approaches in respect of the following topics:

  • Definition of Default
  • Probability of Default (PD)
  • Loss Given Default (LGD)
  • Exposure at Default (EAD)
  • Income-Producing Real Estate Portfolios
  • Unrated Exposures
  • Notification and Approval of Changes to Approved Models

We have revised the feedback statement to address respondents’ comments on: the identification of exposures; the reduction of conversion factors in anticipation of syndication; the application of the point-in-time stress tests applied by firms using variable scalar approaches; and the need for greater clarity in certain areas. The feedback statement also clarifies the application of the LGD framework to social housing portfolios.

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