PRA statement on supervisory benchmarking exercise relating to capital internal models

Overview

This statement provides greater clarity for credit institutions that are in scope of the Prudential Regulation Authority’s (PRA’s) 2021 supervisory benchmarking exercise for capital internal models.^{footnote [1]} This exercise is designed to provide the PRA with specified information from firms in scope in relation to year-end 2020.^{footnote [2]} The statement addresses a difference that has arisen between the intended specifications for this supervisory benchmarking exercise and the applicable UK legislation.

The PRA encourages firms, in scope of the reporting requirements, to submit market risk and credit risk information based on the published final draft package for the 2021 benchmarking exercise.^{footnote [3]} It also clarifies that submission of the IFRS 9 information specified in annexes 8 and 9 of this 2021 final draft package is not required or expected by the PRA.

Background

The supervisory benchmarking exercise for capital internal models is designed to enable the PRA to carry out assessments of firms’ internal approaches for calculating own funds requirements. The reporting requirements for this exercise are updated annually to ensure that the information collected remains relevant for supervisors.

On Monday 14 September 2020, the PRA set out the relevant requirements expected to apply for firms in reporting their year-end 2020 benchmarking data.^{footnote [4]} This update for credit institutions was based on an expectation that the European Union’s (EU) legislation for the supervisory benchmarking exercise would be amended before the end of the UK’s transition period for leaving the EU. In the event, this EU legislation was not amended before the end of the transition period. If these expected amendments had been applicable in EU law during the transition period, this would have updated the benchmarking exercise reporting requirements (for EU and UK firms) to that intended for collecting year-end 2020 data.

Firms must reach their own views as to how to fulfil their legal obligations, including in relation to regulatory reporting. However, the PRA considers that the 2021 benchmarking exercise (ie that intended for collecting year-end 2020 data) provides more relevant information for its supervisory needs than the requirements for the 2019 benchmarking exercise currently applicable in UK law.^{footnote [5]}

Statement

For the 2021 supervisory benchmarking exercise, the PRA encourages firms to use the draft implementing standards in relation to market risk and credit risk data (annexes 1-7 of the 2021 benchmarking exercise reporting package)^{footnote [6]}, in preference to the outdated versions designed for the 2019 benchmarking exercise (ie for year-end 2018 reporting).^{footnote [7]} The PRA would not object to firms submitting information on this basis only.

This approach to market risk and credit risk reporting takes into account that these published annexes for the 2021 reporting package had equivalents for the 2019 supervisory benchmarking exercise that have been incorporated into UK law.

In contrast, firms are not required or expected to submit the IFRS 9 data for the 2021 supervisory benchmarking exercise. This reflects the fact that the annexes relating to IFRS 9 data (annexes 8 and 9) are scheduled to be implemented for the first time for the 2021 benchmarking exercise and so no requirement to submit IFRS 9 information has been brought into UK law. However, the PRA notes that firms may find the IFRS 9 information from the 2021 benchmarking exercise useful for internal management and control purposes, for example through facilitating comparisons between the output of IFRS 9 and other internal models or for discussions with supervisors.

In considering a pragmatic approach to these current highly unusual circumstances, the PRA has taken into account the additional reporting challenges caused by Covid-19, as well as the technical and operational challenges to switching the data requirements at a late stage. The PRA notes that reporting based on the final draft requirements adopted by the European Banking Authority (EBA), and submitted to the European Commission, would be consistent with the approach taken by UK and other EU firms in prior years.

Next Steps

The PRA will set out its proposals for the 2022 benchmarking exercise (ie in relation to reference dates on or around year-end 2021) in a consultation paper in due course. If firms are not planning to use the 2021 benchmarking exercise reporting requirements for market and credit risk data, or have questions with regards to their planned reporting approach, then they should contact their supervisor in the first instance.