UK regulatory update – IRB approach to credit risk

UK regulatory update – IRB approach to credit risk

Background

• On 7 May 2021, the Financial Conduct Authority (FCA) published on its website – as did other UK regulators – the third six-monthly “Regulatory Grid” from the Financial Services Regulatory Initiatives Forum
• Certain items are labelled as “key initiatives in the regulatory landscape” to get further emphasis – that includes the item summarised in this text
• This Regulatory Grid sets out the regulatory pipeline for the next 24 months and enables firms to plan more accurately for forthcoming initiatives
• The Regulatory Grid is published twice a year to help manage the operational impact on firms of implementing initiatives from the Forum members
• This guidance is very important for all organisations within UK financial services

Summary

• This Internal Ratings Based (IRB) initiative for an approach to credit risk is being led by the Prudential Regulation Authority (PRA)
• Policy changes relating to the IRB approach covering Probability of Default estimation, Loss Given Default estimation, the treatment of defaulted exposures, the definition of default, and the ‘hybrid’ approach for residential mortgage modelling
• Firms should submit model applications in line with the timelines communicated by their supervisors, with deadlines during 2021 for mortgage models and deadlines staggered over the course of the 2021/2022 for non-mortgage models
• The PRA published a further consultation in April 2021 relating to the identification of economic downturns; that consultation closes on 7 July 2021

About the Financial Services Regulatory Initiatives Forum

The Financial Services Regulatory Initiatives Forum was launched to strengthen coordination between members.

It is made up of representatives of the Bank of England, Financial Conduct Authority, Prudential Regulation Authority, Payment Systems Regulator, the Competition and Markets Authority, the Information Commissioner’s Office, The Pensions Regulator and the Financial Reporting Council.

HM Treasury is an observer member.

Timeline with relevant dates to be logged on regulatory calendar

The new requirements apply from 1 January 2022

Next steps

All firms need to address requirements to comply with relevant regulatory supervisors.

If anyone has specific questions or needs any advice, contact our specialists.