Internal Ratings Based (IRB) approaches

Supervisory Statement 11/13

Update 6 March 2019

This Supervisory Statement (SS) (available under ‘future version’ below) was updated following Policy Statement 7/19 ‘Credit risk: the definition of default’. The updates take effect from 31 December 2020. See the Annex for more details.

Published on 19 December 2013

This supervisory statement sets out the Prudential Regulation Authority’s (PRA’s) expectations regarding firms’ use of internal ratings based approaches.

The supervisory statement covers the following principal topics:

  • corporate governance;
  • permanent partial use and sequential implementation;
  • overall requirements for estimation;
  • definition of default;
  • probability of default (PD);
  • loss given default (LGD);
  • exposure at default (EAD);
  • validation;
  • income-producing real estate portfolios; and
  • notification and approval of changes to approved models.

Update 9 June 2014: Regulation (EU) No 529/2014 sets out Regulatory Technical Standards (RTS) for assessing the materiality of extensions and changes of the Internal Ratings Based Approach and the Advanced Measurement Approach. This RTS came into force on 9 June 2014 and is directly applicable. SS11/13 remains in place (and firms should continue to use the pro-forma set out in Appendix B to make the notifications required by the RTS), but only to the extent necessary the RTS supersedes the supervisory statement.  We will reissue the supervisory statement to take full account of the RTS in due course.

Current version

Published: 3 October 2017

Future version

Published: 6 March 2019

Published following publication of PS7/19 ‘Credit risk: definition of default’

Effective date: 31 December 2020

Past versions

Published: 19 June 2017

Updated following publication of PS13/17 ‘Residential mortgage risk weights’.

Effective date: 19 June 2017 (superseded on 3 October 2017 by October 2017 version).

 

Published: 11 November 2015

Updated to remove expectations that have been superseded by decisions or technical standards adopted by the European Commission. 

Effective date: 11 November 2015 (superseded on 19 June 2017 by June 2017 version).

 

Published: 19 December 2013

First publication of SS.

Effective date: 19 December 2013.

  • Update 3 October 2017

    SS11/13 was updated alongside the publication of PS23/17 ‘Internal Ratings Based (IRB) approach: clarifying PRA expectations’. This version of SS11/13 updates the version issued on 19 June 2017.

    Update 19 June 2017

    SS11/13 was updated alongside the publication of PS13/17 ‘Residential mortgage risk weights’. This version of SS11/13 updates the version issued on 11 November 2015.

    Update 11 November 2015

    The PRA updated this statement to remove expectations that have been superseded by decisions or technical standards adopted by the European Commission. Specifically, those expectations relating to third country equivalence have been deleted and expectations for the notification of changes to IRB rating systems have been amended. Readers should refer to the equivalence decisions taken by the European Commission and Delegated Regulation (EU) No 529/2014 as amended by Delegated Regulation (EU) No 2015/942 instead – see Related Links. A reference to form FSA004 has been deleted. The model change notification pro-forma, which has also been updated to align with relevant regulation, has been removed from the statement and can now be accessed via the PRA’s webpages using the link provided – see Related Links. Finally, various typographical errors have been corrected throughout the statement. No other expectations have been reviewed or amended and they remain as they were in the original statement published on 19 December 2013.

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