In this Consultation Paper (CP), the Prudential Regulation Authority (PRA) sets out its proposed approach to implementing the European Banking Authority’s (EBA’s) recent regulatory products relating to Probability of Default (PD) estimation, Loss Given Default (LGD) estimation and the treatment of defaulted exposures in the Internal Ratings Based (IRB) approach to credit risk.
The PRA proposes to update the PRA’s expectations in Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’ to implement the EBA’s regulatory products that relate to PD and LGD estimation and the treatment of defaulted exposures (see Appendix).
The proposals are relevant to UK banks, building societies and PRA-designated UK investment firms.
The EBA has developed a roadmap of regulatory products (‘EBA roadmap’) with the aim of reducing unwarranted variability in the risk-weighted assets (RWAs) calculated using banks’ IRB models.
The PRA has decided to consult on its implementation of the EBA roadmap in two phases:
- First phase: definition of default. The PRA consulted on its approach to implementing these products in CP17/18 and published its final approach in Policy Statement (PS) 7/19 ‘Credit risk: The definition of default’.
- Second phase: PD and LGD estimation.
This CP sets out the PRA’s proposed approach to implementing these three products. The PRA notes that the RTS on economic downturn are at the time of publication in draft. This CP (including the proposed changes to SS11/13) assume that the RTS will be made in this form. The PRA will consider further changes that may be required to SS11/13 if the final RTS differ from the final draft.
Responses and next steps
This consultation closes on Wednesday 18 December 2019. The PRA invites feedback on the proposals set out in this consultation. The PRA also invites feedback from firms on the expected impact of the proposals on capital requirements, particularly for the proposals set out in paragraphs 2.6 to 2.8. Please address any comments or enquiries to CP21_19@bankofengland.co.uk.
The policy proposals set out in this CP have been designed in the context of the current UK and EU regulatory framework. In the event that the UK leaves the EU with no implementation period in place, the PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2019 (EUWA). Please see PS5/19 ‘The Bank of England’s amendments to financial services legislation under the European Union (Withdrawal) Act 2018’ for further details.
- The draft SS attached to this CP should be read in conjunction with SS1/19 ‘Non-binding PRA materials: The PRA’s approach after the UK’s withdrawal from the EU’.
- As these changes relate to EU Guidelines, they should be read in conjunction with the joint Bank and PRA Statement of Policy (SoP) ‘Interpretation of EU Guidelines and Recommendations: Bank of England and PRA approach after the UK’s withdrawal from the EU’.