CRD IV: updates for credit risk mitigation, credit risk, governance and market risk

Published on 27 October 2014

Responses to CP12/14 - PS10/14

This policy statement (PS) publishes the feedback, final rules and supervisory statements to implement the proposals in the PRA’s consultation paper (CP) for CRDIV updates for credit risk mitigation, credit risk, governance and market risk (CP12/14).

This PS covers the proposals in CP12/14 subject to a one-month consultation period, which closed on 8 August 2014.

The following changes are made to PRA policy:

• the supervisory statement on credit risk mitigation (SS17/13) is updated with the expectation that a firm wishing to use its own estimates of volatility adjustments shall provide the PRA with confirmation that it meets the requirements set out in CRR Articles 225(2) and 225(3), together with the information set out in SS17/13;
• the supervisory statement on market risk (SS13/13) is updated with guidance for firms on how to report Risks not in VaR requirements in FSA005, and the European Banking Authority's common regulatory reporting framework (COREP);
• a new rule in Credit Risk 4 of the PRA Rulebook to introduce stricter criteria for the application of a 50% risk weight to certain commercial real estate exposures located in non-EEA countries; and
• guidance added to SYSC 4 of the PRA Handbook to clarify the PRA’s interpretation of how the CRD IV limits on directorships held by directors of significant firms apply to the individuals who manage the consolidated group.

CP12/14 also contained a proposal relating to an expectation that approval will no longer be granted for advanced internal ratings-based approach permissions for sovereign and financial sector entity exposures. The consultation period for this proposal closed on 30 September 2014. On 10 March 2015, the PRA announced that it is not taking forward the proposals at this time preferring instead to wait for further clarity on the direction of international developments. Once this clarity is attained, the PRA will consider its policy options.

Policy Statement 10/14

Supervisory Statements

Supervisory Statement 13/13

Supervisory Statement 17/13

Published on 30 June 2014

CRD IV: updates for credit risk mitigation, credit risk, governance and market risk - CP12/14

This consultation seeks views on proposed changes to the Prudential Regulation Authority’s (PRA) rules, guidance and supervisory statements in the areas of credit risk mitigation, credit risk, governance and market risk.

Background

The PRA published rules, and accompanying supervisory statements, to implement the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) (jointly, CRD IV) in December 2013. Following feedback from firms and industry, and its own assessment of how the CRD IV rules and supervisory statements are being applied by firms, the PRA is consulting on proposals to provide further clarity.

Summary of the proposals covered by the consultation paper (CP)

CP12/14 seeks views on:

1. expectations for firms applying for permission to use own estimates of volatility adjustments under the Financial Collateral Comprehensive Method;
2. expectations that approval will not be granted for permission to use the advanced internal ratings-based approach in relation to exposures to central governments, public sector entities, central banks and financial sector entities;
3. a proposed rule to introduce stricter criteria for the application of a 50% risk weight to certain commercial real estate exposures located in non-EEA countries;
4. additional guidance to clarify the PRA’s interpretation of how the CRD IV limits on directorships held by directors of significant firms apply to the individuals who manage the consolidated group; and
5. guidance for firms on how to report Risks not in VaR requirements in FSA005.

The consultation for items (1), (3), (4) and (5) above closed on 8 August 2014. The PRA published feedback, final rules and supervisory statements to implement proposals in PS10/14 (see Related Links). The consultation for item (2) closed on 30 September 2014.

Update 10 March 2015 for item (2): The PRA consulted in June 2014 (CP12/14) on a proposal to replace existing advanced internal rating based (AIRB) permissions with foundation internal ratings based (FIRB) permissions for sovereign and financial sector entity exposures by June 2015, due to an identified lack of industry-wide default data. The PRA received a number of comments as well as data on potential impact.

Subsequent to the PRA consultation, the Basel Committee on Banking Supervision (BCBS) announced an intention to develop policy proposals to reduce excessive variability from banks’ risk modelling practices. These may include the introduction of fixed loss-given-default parameters for portfolios of unsecured loans that have low numbers of defaults and, as such, limited loss data.

In light of this development the PRA has decided not to take forward the proposals at this time preferring instead to wait for further clarity on the direction of international developments. Once this clarity is attained, the PRA will consider its policy options.

Consultation Paper 12/14