Credit risk: Probability of Default and Loss Given Default estimation

Consultation Paper 21/19
Published on 18 September 2019

Overview

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.

Background

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:

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.

PDFConsultation Paper 21/19

Was this page useful?
Add your details...