PRA consultation CP 21/19: Credit risk: loss calculation estimations
- Credit risk: Probability of Default and Loss Given Default estimatio
- Published by the PRA on 18 September 2019
- In this Consultation Paper (CP), the Prudential Regulation Authority (PRA) sets out its proposed approach to implementing the European Banking Authority’s (EBA’s) recent regulatory products relating to Probability of Default (PD) estimation, Loss Given Default (LGD) estimation and the treatment of defaulted exposures in the Internal Ratings Based (IRB) approach to credit risk.
- The PRA proposes to update the PRA’s expectations in Supervisory Statement (SS) 11/13 ‘Internal Ratings Based (IRB) approaches’ to implement the EBA’s regulatory products that relate to PD and LGD estimation and the treatment of defaulted exposures (see Appendix).
- The proposals are relevant to UK banks, building societies and PRA-designated UK investment firms.
- The EBA has developed a roadmap of regulatory products (‘EBA roadmap’) with the aim of reducing unwarranted variability in the risk-weighted assets (RWAs) calculated using banks’ IRB models.
- The PRA has decided to consult on its implementation of the EBA roadmap in two phases:
- First phase: definition of default. The PRA consulted on its approach to implementing these products in CP17/18 and published its final approach in Policy Statement (PS) 7/19 ‘Credit risk: The definition of default’.
- Second phase: PD and LGD estimation.
- The policy proposals set out in this CP have been designed in the context of the current UK and EU regulatory framework. In the event that the UK leaves the EU with no implementation period in place, the PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2019 (EUWA).
Timeline with relevant dates to be logged on regulatory calendar
- Consultation opens on 18 September 2019
- Consultation closes on 18 December 2019