1

Introduction

1.1

This supervisory statement (SS) is aimed at firms to which the Capital Requirements Regulation[1] applies.

Footnotes

  • 1. Capital Requirements Regulation (575/2013) as it has effect in domestic law (CRR).

1.2

Article 143(1) of the CRR requires the Prudential Regulation Authority (PRA) to grant permission to use the Internal Ratings Based (IRB) approach where it is satisfied that the requirements of Title II Chapter 3 of the CRR are met. The purpose of this supervisory statement is to provide explanation, where appropriate, of the PRA’s expectations when assessing whether firms meet those requirements, including in respect of the conservatism applied.

1.3

Responsibility for ensuring that internal models are appropriately conservative and are CRR compliant rests with firms themselves. The PRA stated in The PRA’s approach to banking supervision that ‘if a firm is to use an internal model in calculating its regulatory capital requirements, the PRA will expect the model to be appropriately conservative’.

1.4

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1.5

On 19 June 2017 the PRA amended its expectations regarding residential mortgage rating systems. On 6 March 2019, the PRA updated its expectations regarding the definition of default. On 14 May 2020, the PRA updated its expectations regarding Probability of Default (PD) and Loss Given Default (LGD) estimation.[2] The PRA expects that all rating systems should be amended in line with these new expectations by Saturday 1 January 2022.

Footnotes

  • 2. See Annex for the list of changes for the mortgage hybrid approach, the definition of default, PD estimation and LGD estimation.

1.6

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1.7

The PRA expects that this document will be revised on a periodic basis.

1.8

Where this SS refers to EBA Guidelines, these are to the versions as issued by the EBA as at the end of the transition period following the UK’s withdrawal from the EU. A list of the EBA Guidelines referenced in this SS, and links to the versions as they stood at the end of the transition period can be found in Appendix D. The PRA does not expect firms to comply with changes to those Guidelines that the EBA makes after the end of the transition period (11pm on Thursday 31 December 2020).