Prudential Regulation Authority Rulebook

Paragraphs 19.1 to 19.12 have been deleted.

19.13

There will be some circumstances where a fee may be applied, for example, where a firm is upgrading from FIRB to AIRB, or a special project fee in the case of a merger or acquisition.

Paragraphs 19.14 and 19.15 have been deleted.

19.16

Firms should address identified model issues in a timely fashion with suitable model changes, and ensure that such changes are implemented in accordance with the appropriate model changes process. The PRA recognises, however, that there are instances where it is prudent and correct for firms to adjust the capital requirements produced by their models on a temporary basis. The PRA does not expect any such adjustment to be in place for a period longer than six months and firms should take any action required to remove an adjustment (including notifying the PRA of a model change where appropriate) within that period.

19.17

Firms should meet the following criteria in respect of any temporary adjustments to approved models:

1. (a) The framework must be applied at a portfolio level. For this a ‘portfolio’ is defined as the group of assets covered by the IRB model the adjustment is being made for. If adjustments are being made to more than one model (eg PD and LGD) which cover overlapping assets (eg a global LGD model and regional PD models), then a portfolio(s) must be defined as the subset of assets covered by the same models (eg in the example above the assets covered by the regional PD model would be classified as a single portfolio).
2. (b) Irrespective of what model component the adjustment is for (eg PD, LGD or EAD) the RWA and EL adjustments are made as a portfolio level add-on to the requirements produced by the approved models (ie the underlying models must not be recalibrated or changed to give the desired capital outcome).
3. (c) Firms’ PD, LGD and EAD models remain in place until the correct level of approval has been obtained for any changes. These models continue to be monitored as required by the CRR.
4. (d) Only adjustments that increase RWA and EL are made and there should be no netting of adjustments across portfolios (eg if there are two data issues, in separate portfolios, one which increases RWA by £200 million and one that decreased RWA by £100 million, only the adjustment increase of £200 million is applied). Where netting of impacts is proposed, this is applied in the relevant portfolio (ie where a model covers a number of portfolios, netting can only be done at a portfolio level).
5. (e) A list of all model adjustments is included in the firm’s model monitoring information presented to senior management, containing the following information as a minimum:
   
   1. (i) the portfolio and model component affected;
   2. (ii) a description of the issue and why it requires the adjustment;
   3. (iii) the date when the issue was first identified;
   4. (iv) what action is being taken to address the issue and the timeline for this action; and
   5. (v) the increase to RWA and EL as a result of the adjustment.
6. (f) Firms may make adjustments across model components (eg PD, LGD and EAD), however if the PRA judges that a firm is not applying the netting across components appropriately, or with the correct degree of conservatism, then it will require that netting is permitted only within a model component (eg if the adjustment to PD increases capital and to LGD decreases capital, the firm would only apply the increased capital that results from the PD adjustment).

19.18

Firms should include any EL and RWA adjustments in their regulatory returns. In respect of the FSA045 return the total RWA and EL figures for each of the PD grades should be increased proportionally.

19.19

The PRA expects models to be appropriately conservative and capture all relevant risks. Responsibility for ensuring this lies with firms.

19.20

It may be the case that some IRB mortgage models – despite receiving regulatory approval and otherwise complying with relevant regulatory standards – have material risk capture deficiencies resulting in inappropriately low modelled RWAs.

19.21

There may therefore be instances where it is prudent and correct for firms to adjust upwards the RWAs produced by their models on a permanent basis.

19.22

At a portfolio level, the PRA considers that models resulting in an exposure-weighted average portfolio risk-weight for UK residential mortgage exposures of less than 10% are likely to be materially deficient in risk capture. The PRA therefore expects firms to adjust the overall exposure-weighted average portfolio risk-weight to ensure it is at least 10%. Firms should exclude defaulted mortgage exposures when calculating average portfolio risk-weights.

19.23

Firms may make post-model adjustments to meet these expectations.

19.24

Firms should include any RWA adjustments in their regulatory returns.

19.26

Where a firm is using an impairment model as their Best Estimate of Expected Loss model, under Section 7.3.2.3 of the EBA’s Guidelines on PD estimation, LGD estimation and the treatment of defaulted assets (EBA/GL/2017/16), the PRA accepts that there may need to be temporary divergence between the impairment model and the approved IRB model due to the need to make timely changes to accounting impairment models. This will be as and when changes need to be made to the accounting impairment model and to the extent that the change in the impairment model necessitates a change to the approved IRB model. This temporary divergence should be limited to the period until the IRB model change may be implemented following notification to or approval by the PRA, as appropriate.