Published on 19 June 2017
Residential mortgage risk weights – PS13/17
This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback on responses to Consultation Paper (CP) 29/16 ‘Residential mortgage risk weights’. The CP set out proposed changes to the calculation of risk-weighted capital requirements in relation to residential mortgage portfolios.
This PS is relevant to banks and building societies that use the Internal Ratings Based (IRB) approach to calculate credit risk capital requirements for residential mortgages.
This PS contains the final amendments to Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’.
Following consideration of respondents’ comments, the PRA has made several changes to the draft amendments to the SS contained in Appendix 1 of the CP. These changes are explained in Chapter 2. The changes extend the timetable for firms to meet the new expectations, amend the definition and formulation of cyclicality, clarify the application of the cyclicality cap to historical modelling, and emphasise the PRA expectation that firms should use margins of conservatism where there are low historical data.
In line with the approach adopted in the CP, the PRA has also decided to re-number paragraphs in the SS which follow inserted and deleted paragraphs.
The PRA does not consider that the changes made to the proposals contained in the CP are significant enough to have any additional material impact on firms, and so has not provided an updated cost benefit analysis.
Feedback on consultation responses
The PRA received nine responses to CP29/16. Most respondents supported the broad aim of the proposals, but a number of issues were raised and some sought greater clarity on certain aspects of the PRA’s revised expectations. Specific areas where the PRA has amended the proposals are detailed in Chapter 2 of the PS.
Appendices
Supervisory Statement 11/13 UPDATE
Stylised example of the application of the cyclicality cap
Published on 29 July 2016
Residential mortgage risk weights – CP29/16
Background
This consultation sets out proposed changes to the Prudential Regulation Authority’s (PRA) Supervisory Statement on internal ratings based (IRB) approaches to calculating risk-weighted capital requirements for banks and building societies (SS11/13).
The consultation is relevant to PRA-authorised firms that have either obtained or may seek to obtain permission to use the IRB approach to calculate risk-weighted assets for their residential mortgage portfolios.
Summary of proposals
- The PRA proposes to amend the SS11/13 such that firms would be expected to adopt probability of default modelling approaches for their residential mortgage portfolios that avoid the lack of risk capture identified in the point-in-time and through-the-cycle models currently used by firms, and instead calibrate their models using a consistent and appropriate assumption for the level of model cyclicality.
- The PRA also proposes to expect firms not to apply a house price fall assumption of less than 25% in their UK residential mortgage loss given default models.
Implementation
The PRA proposes that these changes will come into effect by 31 March 2019 with firms allowed until 31 May 2018 to submit for approval adjusted residential mortgage models meeting these expectations.
Responses
This consultation closed on 31 October 2016.