PRA statement on EBA Guidelines and EU Regulatory Technical Standards relating to approaches to credit risk following the end of the transition period

This statement provides clarity on the PRA’s approach to published European Banking Authority Guidelines and EU Regulatory Technical Standards relating to the Standardised and Internal Ratings Based approaches to credit risk following the end of the transition period.
Published on 25 February 2021

Please note: Due to the short nature of this statement, we have presented the text on this webpage, without a separate document. You can use the ‘Convert this page to PDF’ button below to create a copy.

Clarification of the PRA’s approach

The final draft RTS on the specification of the nature, severity and duration of an economic downturn (EBA/RTS/2018/04) (‘the RTS on economic downturn Opens in a new window’) 

The PRA noted in Policy Statement (PS) 11/20 ‘Credit risk: Probability of Default and Loss Given Default estimation’ that the RTS was in draft, at the time of the PS’s publication. PS11/20, including relevant changes to the future version of Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’, assumed that the RTS would be made before the end of the transition period in the same form as the draft. The PRA also stated that it would consider further changes that may be required to SS11/13 if the final RTS differed from the current draft. However, the RTS on economic downturn was not onshored into UK legislation at the end of the transition period, as it did not form part of retained EU law under the EU (Withdrawal) Act 2018. 

Despite this, the PRA intends to consult in due course on proposals to incorporate these requirements into UK regulation, with expected implementation dates as set out in PS11/20.

Guidelines on credit risk mitigation (CRM) for institutions applying the IRB approach with own estimates of loss given default (LGD) (EBA/GL/2020/05) (‘the GL on CRM Opens in a new window’)

The GL on CRM do not apply in the UK, but the PRA will consider the contents when it takes decisions related to the CRM framework as part of its implementation of Basel 3.1 standards. 

The final draft RTS on assigning risk weights to specialised lending exposures (EBA/RTS/2016/02) (‘the RTS on specialised lending Opens in a new window’) and the final draft RTS on the specification of the assessment methodology for competent authorities regarding compliance of an institution with the requirements to use the IRB approach (EBA/RTS/2016/03) (‘the RTS on assessment methodology Opens in a new window’)

The PRA notes that neither the RTS on specialised lending nor the RTS on assessment methodology were onshored into UK legislation at the end of the transition period and therefore they do not apply in the UK. The PRA will continue to apply high standards in respect of capital requirements for specialised lending exposures and its approach to model assessment.

Guidelines for the estimation of LGD appropriate for an economic downturn (EBA/GL/2019/03) (‘the GL on downturn LGD Opens in a new window’)

As outlined in PS11/20 and SS11/13, the PRA expects firms to comply with these GL.

Guidelines on the application of the definition of default (EBA/GL/2016/07) (‘the GL on the definition of default Opens in a new window’)

As outlined in Policy Statement (PS) 7/19 ‘Credit risk: The definition of default’ and SS11/13, the PRA expects firms to comply with these GL.

Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures (EBA/GL/2017/16) (‘the GL on PD & LGD Opens in a new window’)

As outlined in PS11/20 and SS11/13, the PRA expects firms to comply with this GL with the partial exception of paragraph 135. In this respect the PRA expects firms to comply with the GL in line with paragraph 13.A1 of SS11/13. 

The RTS for the materiality threshold for credit obligations past due (Commission Delegated Regulation (EU) 2018/171) (’the RTS on materiality thresholds Opens in a new window’)

The PRA notes that this RTS was onshored at the end of the transition period and continues to apply in the UK. Firms should comply with the relevant PRA Rulebook requirements and associated SS11/13 expectations as set out in PS7/19. 

Implementation deadlines

PS11/20 sets an implementation deadline of Saturday 1 January 2022 (except in respect of the RTS on materiality thresholds for firms only using the Standardised Approach, where the implementation deadline was Thursday 31 December 2020). Firms should continue to submit model change applications in line with the submission timings communicated by their supervisors.

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