PS13/21 - Credit risk: The approach to overseas Internal Ratings Based (IRB) models
Overview
This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 16/20 ‘Credit Risk: The approach to overseas Internal Ratings Based (IRB) models’ (page 2 of 2). It also contains the PRA’s final policy, as follows:
- an updated Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’ (Appendix 1); and
- an updated pro-forma for firms to complete and submit to the PRA for overseas models moving onto the overseas models approach (Appendix 2).
This PS is relevant to UK banks, building societies, and PRA-designated investment firms.
Summary of responses
The PRA received three responses to the CP. Respondents generally supported the PRA’s proposals. Some responses outlined specific concerns and requested further clarification. Specific areas where the PRA has amended or clarified the proposals are detailed in Chapter 2.
The PRA considers the main issues raised during the consultation relate to:
i. the aggregate amount of credit risk risk-weighted assets (RWAs) derived using overseas models and the aggregate amount of exposure value allowed on the OMA;
ii. the scope of jurisdictions eligible for the OMA; and
iii. the scope of asset classes eligible for the OMA.
Implementation
For existing overseas IRB models built to non-UK requirements that are not currently used for UK consolidated capital requirements, there are two options:
i. firms that wish to use the OMA can now submit applications using the updated pro forma on the PRA’s website. The implementation date for the changes resulting from this PS begins Thursday 1 July 2021; or
ii. firms that do not wish to use the OMA can continue not to use it for UK consolidated capital requirements.
For existing overseas IRB models built to non-UK requirements that are already used for UK consolidated capital requirements, there are three options:
i. if these models meet the new OMA criteria, they can continue to be used for UK consolidated capital requirements. Firms should submit a self-attestation that the criteria are met;
ii. if these models do not meet the OMA’s criteria from Thursday 1 July 2021, firms may need to remediate these models in order to meet UK IRB requirements or the criteria for the OMA. The PRA expects those models that do not meet the criteria to be remediated by Sunday 1 January 2023; or
iii. if firms do not wish to use these models on the OMA, they will need to develop models that meet UK IRB requirements and discuss this with their supervisor.
The proposals set out in this PS have been designed in the context of the UK having left the EU and the transition period having come to an end. Unless otherwise stated, any references to EU or EU derived legislation refer to the version of that legislation which forms part of retained EU law. The PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework.
Policy Statement 13/21
Appendix
CP16/20 - Credit risk: The approach to overseas Internal Ratings Based (IRB) models
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.