Prudential Regulation Authority Rulebook

21.1

The PRA expects that it will permit the use of an overseas model built to non-UK IRB standards in the calculation of UK consolidated capital requirements if all of the following criteria are met:

1. (a) the aggregate amount of RWAs calculated using overseas models is no more than 7.5% of the group’s total credit risk RWAs and the aggregate overseas models’ exposure value is no more than 7.5% of the group’s total exposure value;
2. (b) the model scope only encompasses exposures that are located within a subsidiary in an equivalent jurisdiction (as determined under CRR Article 142(2)), the model has been reviewed and approved by the overseas regulator, and the model is used to calculate local capital requirements in that jurisdiction;
3. (c) the model only encompasses exposures in the retail exposure class and/or SME exposures in the corporate exposure class;
4. (d) modelled outputs (such as PD, LGD and CF) are derived using both historical experience and empirical evidence (and not based purely on judgemental considerations), and the estimates are plausible, intuitive and based on the material drivers of the respective risk parameters;
5. (e) the population of exposures represented in the data used for estimation, the lending standards used when the data were generated, and other relevant characteristics, are comparable with those of the firm’s exposures and standards. The number of exposures in the sample and the data period used for quantification shall be sufficient to provide confidence in the accuracy and robustness of estimates;
6. (f) the model provides a meaningful differentiation of risk and is able to produce accurate and consistent quantitative estimates of risk. Material model weaknesses shall be adequately compensated by an adjustment to parameter estimates;
7. (g) the model is subject to appropriate internal governance processes, with senior management in the overseas subsidiary possessing a general understanding of the rating systems of the institution and detailed comprehension of its associated management reports;
8. (h) the model is subject to an appropriate validation of internal estimates process, with the process being objective, consistent, and accurate; and
9. (i) the model is used to inform credit risk decisions.

21.2

The PRA expects firms using models built to non-UK standards to ensure that their UK consolidated capital requirements reflect any regulatory floors or add-ons mandated by the relevant overseas regulator.

21.3

For criterion (a) in paragraph 21.1, the group’s credit risk RWAs and total exposure value should be calculated according to the ‘Part 3, Title II Capital Requirements for Credit Risk’ section of the CRR.