SS4/24 – Credit risk internal ratings based approach

Supervisory statement 4/24

First published on 12 September 2024

This supervisory statement (SS) sets out the Prudential Regulation Authority’s (PRA’s) expectations in respect of the application of the IRB approach in the calculation of credit risk risk-weighted assets and provides explanation, where appropriate, of the PRA’s expectations when assessing whether firms meet those requirements, including in respect of the conservatism applied. 

This SS is relevant to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or PRA-designated financial or mixed financial holding companies (collectively ‘firms’).

The SS has 21 chapters:

  • Chapter 1: introduction and definitions
  • Chapter 2: permission to use the IRB approach
  • Chapter 3: partial use and reversion to less sophisticated approaches
  • Chapter 4: use and experience test
  • Chapter 5: qualifying revolving retail exposures
  • Chapter 6: high level expectations
  • Chapter 7: rating systems
  • Chapter 8: data representativeness
  • Chapter 9: model deficiencies and margin of conservatism
  • Chapter 10: PD – model developments
  • Chapter 11: PD – calibration
  • Chapter 12: LGD – general expectations and model development
  • Chapter 13: LGD – calibration (general)
  • Chapter 14: LGD – calibration (long-run average)
  • Chapter 15: LGD – calibration (downturn)
  • Chapter 16: LGD – in-default estimation
  • Chapter 17: EAD – model development and calibration 
  • Chapter 18: the slotting approach 
  • Chapter 19: application of risk parameters
  • Chapter 20: stress tests used in the assessment capital adequacy
  • Chapter 21: review of estimates (validation)

Near-final version

Published on 12 September 2024. Effective from 1 January 2026

- Following PS9/24 – Implementation of the Basel 3.1 standards near-final part 2