Credit risk

PS23 / 21 | CP7 / 21 – Credit risk: Identifying the nature, severity and duration of an economic crisis …

Posted on October 20, 2021

Credit Risk: Identifying the Nature, Severity and Duration of an Economic Downturn for the Purposes of Internal Ratings Based Models (IRBs) – PS23 / 21

Overview

This policy statement (PS) from the Prudential Regulatory Authority (PRA) provides comments on the responses to consultation document (CP) 7/21 “Credit risk: identifying the nature, severity and the duration of an economic downturn for the purposes of internal assessments based on (IRB) ”(page 2 of 2). It also contains the final PRA policy, as follows:

  • a new UK technical standards instrument (Annex 1);

  • an update of the Prudential Statement (SS) 11/13 “Approaches based on internal ratings (IRB)” (Annex 2); and

  • versions of the relevant European Banking Authority (EBA) guidelines as they stood at the end of the transition period (Annexes 3 to 5).

This SP applies to UK banks, building societies and UK investment firms designated by the PRA.

Summary of responses

The PRA received two responses to the CP. Interviewees welcomed the PRA’s proposal to introduce requirements to identify an economic downturn as UK technical standards, as well as the related amendment to SS11 / 13. Respondents made a number of comments and requests for clarification. The specific areas in which the PRA amended or clarified the proposals are detailed in Chapter 2. Respondents also welcomed the minor changes proposed by the PRA to SS11 / 13 to reflect the UK’s withdrawal from the EU and the end of the transition period.

Implementation

The implementation date for policy changes resulting from this PS will be Saturday January 1, 2022. This is in line with the implementation deadlines defined in PS11 / 20 “Credit risk: Probability of Default and Loss Given Default Estimation”, for IRB companies to implement all changes to the IRB roadmap (except with regard to Regulatory Technical Standards (RTS) on the materiality threshold of overdue credit obligations under Article 178 of the Regulation (EU) No 575/2013 for companies using only the standardized approach, when the implementation deadline was Thursday 31 December 2020).

Companies should continue to submit model change requests in accordance with the submission deadlines communicated by their supervisors.

References related to UK accession to the EU in SS11 / 13 covered by this NP policy have been updated as part of this NP to reflect the UK’s withdrawal from the EU. Unless otherwise specified, any remaining references to EU or derived EU law refer to the version of that law that is part of retained EU law.

Policy Statement 23/21

Annex

Posted on April 07, 2021

Credit Risk: Identifying the Nature, Severity and Duration of an Economic Downturn for the Purposes of Internal Ratings Based Models (IRBs) – CP7 / 21

Overview

This consultation document (PC) presents the approach proposed by the Prudential Regulatory Authority (PRA) to implement new requirements relating to the specification of the nature, severity and duration of an economic slowdown in the internal ratings-based (IRB) approach to credit risk.

This CP’s proposals would result in new UK technical standards (Annex 1) and amended expectations in Supervisory Statement (SS) 11/13 “Internal Ratings Based Approaches (IRB)” (Annex 2) “.

The PRA also proposes 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 concern UK banks, mortgage lenders and UK investment firms appointed by the PRA.

Implementation

The PRA proposes that the implementation date for changes resulting from this PC be Saturday January 1, 2022, in accordance with the implementation deadlines set out in Policy Statement (SP) 11/20 for IRB firms to implement. implemented all changes to the IRB roadmap (except for the RTS on materiality thresholds for companies using only the standardized approach, whose implementation deadline was Thursday 31 December 2020). Companies should continue to submit model change requests in accordance with the submission deadlines communicated by their supervisors.

Answers and next steps

This consultation closes on Wednesday July 7, 2021. The PRA is seeking comments on the proposals set out in this consultation. The PRA is also seeking comments from companies on the expected impact of the proposals on capital requirements. Please direct any comments or inquiries to [email protected]

The proposals set out in this FP were conceived in the context of the UK’s exit from the EU and the end of the transition period. Unless otherwise indicated, any reference to EU or derived EU law refers to the version of that law that is part of retained EU law. The PRA will keep the policy under review to assess whether any changes would be needed due to changes in the UK regulatory framework.

Consultation document 7/21


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