PS16/21| CP14/20 - Internal Rating Based UK mortgage risk weights: Managing deficiencies in model risk capture

Published on 6 July 2021

PS16/21 - Internal Rating Based UK mortgage risk weights: Managing deficiencies in model risk capture

Overview

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 14/20, ‘Internal Ratings Based UK mortgage risk weights: Managing deficiencies in model risk capture’ (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’.

This PS is relevant to PRA-authorised UK banks, building societies, and ring-fenced banks (RFBs) holding IRB model permissions. It may be of interest to other firms, including those considering applying for IRB model permission, and other market participants.

Summary of responses

The PRA received ten responses to the CP. Respondents made a number of observations, which are set out in Chapter 2.

Respondents were generally not in favour of the proposed minimum expectations, with particular concerns raised against the proposed 7% risk weight minimum expectation for individual UK mortgage exposures. One respondent expressed caveated support for the measures.

Implementation

The amendments to SS11/13 will take effect from Saturday 1 January 2022.

Revised PD and LGD parameter minimum values will be consulted on as part of the PRA’s implementation of the Basel 3.1 standards.

The policy in this PS has been designed in the context of the UK having left the European Union 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.

Policy Statement 16/21

Appendix

Appendix 1: Update to Supervisory Statement 11/13 ‘Internal Ratings Based (IRB) approaches’

Published on 30 September 2020

CP14/20 - Internal Ratings Based UK mortgage risk weights: Managing deficiencies in model risk capture

Overview

This Consultation Paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposals to introduce new expectations on Internal Ratings Based (IRB) approach UK mortgage risk weights.

The proposals in this CP would result in changes to Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’.

This CP is relevant to PRA-authorised UK banks, building societies, and ring-fenced banks (RFBs) holding IRB model permissions. It may be of interest to other firms, including those considering applying for IRB model permission, and other market participants.

The purpose of these proposals is to address the prudential risks stemming from inappropriately low IRB UK mortgage risk weights. An additional benefit from these proposals would be a narrowing of differentials between IRB and standardised approach UK mortgage risk weights, and a limit on future divergence. The PRA considers that this would support competition between firms on the different approaches.

The PRA does not expect these proposals to result in significant implementation costs. For those firms whose risk weights may increase as a result of these proposals, and where capital requirements are not already determined by other capital measures (eg leverage), there would be costs for the firm associated with the additional capital required.

Responses and next steps

This consultation closes on Saturday 30 January 2021. The PRA invites feedback on the proposals set out in this CP. Please address any comments or enquiries to CP14_20@bankofengland.co.uk.

The PRA also encourages IRB firms to complete Appendix 2 as part of their feedback. Any data that the PRA receives as part of this consultation will help inform the PRA’s final proposals.