Credit risk: The approach to overseas Internal Ratings Based (IRB) models

Consultation Paper 16/20
Published on 12 October 2020

Overview

This Consultation Paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposed approach in respect of firms’ use of overseas Internal Ratings Based (IRB) credit risk models built to non-UK regulatory requirements, in the calculation of UK group consolidated capital requirements.

The proposals in this CP would result in changes to Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’ (Appendix) to include the PRA’s approach to overseas IRB models.

The proposals are relevant to UK banks, building societies and PRA-designated UK investment firms.

Background

The PRA currently permits the solo capital requirements generated by non-European Economic Area (EEA) IRB models (developed to meet non-EEA IRB requirements) to be included in the firms’ UK group consolidated capital requirements.

These overseas models may not be fully compliant with all relevant UK IRB requirements as they are designed to comply with non-UK IRB requirements, although the PRA’s criteria seek to ensure a prudent approach.

Implementation

For overseas IRB models built to non-UK requirements that are not currently used for UK consolidated capital requirements, the proposed implementation date for the changes resulting from this CP would be Thursday 1 July 2021. For existing overseas IRB models built to non-UK requirements used for UK consolidated capital requirements that meet the proposed criteria, those models can continue to be used for UK consolidated capital requirements. There may be existing overseas models that do not meet the criteria for use of the revised approach from Thursday 1 July 2021, and firms may therefore need to remediate these models in order to meet UK IRB requirements. The PRA expects those models that do not meet the proposed criteria to be remediated by Sunday 1 January 2023 in line with the planned implementation of Basel 3.1.

Responses and next steps

This consultation closes on Tuesday 12 January 2021. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP16_20@bankofengland.co.uk.

PDFConsultation paper 16/20

Consultation ends: 12 January 2021

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