PS23/21 | CP7/21 - Credit risk: The identification of the nature, severity, and duration of an economic downturn for the purposes of Internal Ratings Based (IRB) models

Published on 20 October 2021

Credit risk: The identification of the nature, severity, and duration of an economic downturn for the purposes of Internal Ratings Based (IRB) models - PS23/21

Overview

This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 7/21 ‘Credit risk: The identification of the nature, severity, and duration of an economic downturn for the purposes of Internal Ratings Based (IRB) models’ (page 2 of 2). It also contains the PRA’s final policy, as follows:

• a new UK Technical Standards Instrument (Appendix 1);
• an updated Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’ (Appendix 2); and
• versions of the relevant European Banking Authority (EBA) Guidelines as they stood at the end of the transition period (Appendices 3–5).

This PS is relevant to UK banks, building societies, and PRA-designated UK investment firms.

Summary of responses

The PRA received two responses to the CP.  Respondents welcomed the PRA’s proposal to introduce requirements for identifying an economic downturn as UK Technical Standards, as well as the related amendment to SS11/13. Respondents made a number of observations, and requests for clarification. Specific areas where the PRA has amended or clarified the proposals are detailed in Chapter 2. Respondents also welcomed the PRA’s proposed minor changes to SS11/13 to reflect the UK’s withdrawal from the EU and the end of the transition period.

Implementation

The implementation date for the policy changes resulting from this PS will be Saturday 1 January 2022. This is in line with the implementation deadlines set out in PS11/20 ‘Credit risk: Probability of Default and Loss Given Default Estimation’, for IRB firms to implement all changes from the IRB roadmap (except in respect of the Regulatory Technical Standards (RTS) on the materiality threshold for credit obligations past due under Article 178 of Regulation (EU) No 575/2013 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.

References related to the UK’s membership of the EU in SS11/13 covered by the policy in this PS have been updated as part of this PS to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.

Policy Statement 23/21

Appendix

• Appendix 1: PRA STANDARDS INSTRUMENT: TECHNICAL STANDARDS (ECONOMIC DOWNTURN) INSTRUMENT 2021 (pdf)
• Appendix 2: Update to Supervisory Statement 11/13 ‘Internal Ratings Based (IRB) approaches’
• Appendix 3: Guidelines for the estimation of LGD appropriate for an economic downturn (‘Downturn LGD estimation’) (pdf)
• Appendix 4: Guidelines on the application of the definition of default under Article 178 of Regulation (EU) No 575/2013 (pdf)
• Appendix 5: Guidelines on PD estimation, LGD estimation and the treatment of defaulted exposures (pdf)

Published on 07 April 2021

Credit risk: The identification of the nature, severity, and duration of an economic downturn for the purposes of Internal Ratings Based (IRB) models - CP7/21

Overview

This Consultation Paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposed approach to implementing new requirements relating to the specification of the nature, severity, and duration of an economic downturn in the Internal Ratings Based (IRB) approach to credit risk.

The proposals in this CP would result in new UK Technical Standards (Appendix 1) and amended expectations in Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’ (Appendix 2)'.

The PRA is also proposing to make additional minor changes to SS11/13 to reflect the UK’s exit from the EU, which are set out in Chapter 3 of this CP.

The proposals are relevant to UK banks, building societies, and PRA-designated UK investment firms.

Implementation

The PRA proposes that the implementation date for the changes resulting from this CP would be Saturday 1 January 2022, in line with the implementation deadlines set out in Policy Statement (PS) 11/20 for IRB firms to implement all changes from the IRB roadmap (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.

Responses and next steps

This consultation closes on Wednesday 7 July 2021. The PRA invites feedback on the proposals set out in this consultation. The PRA also invites feedback from firms on the expected impact of the proposals on capital requirements. Please address any comments or enquiries to CP7_21@bankofengland.co.uk.

The proposals set out in this CP 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.

Consultation Paper 7/21