It also proposes amendments to the PRA’s expectations in respect of the IRB approach and the definition of default used for both the IRB approach and the standardised approach (SA) to credit risk. Set and maintained by the Basel Committee on Banking Supervision, the rules require banks to hold a minimum level of capital against their total RWAs. Under the latest Basel III regime, firms calculate credit risk capital either using a regulator-set, standardised method, or using their own models, known as the http://passo.su/forums/index.php?showtopic=2263&mode=threaded internal ratings-based approach. 4.310 The PRA considers that the proposed approach to maturity set out in this section would advance the PRA’s primary objective of safety and soundness. The proposals would result in more risk-sensitive and more accurate estimations of effective maturity that reflect the economic substance of the exposures. 4.305 The PRA currently specifies within IRB permissions that firms using the FIRB approach must calculate effective maturity rather than apply fixed parameters.

4.203 The PRA proposes to apply the 0.1% PD floor to UK retail residential mortgage exposures only. Non-UK retail residential mortgage exposures would be subject to the 0.05% PD floor, in line with the Basel 3.1 standards, as the PRA does not have evidence that a higher PD floor would be justified for non-UK retail residential mortgage exposures. 4.193 The PRA considers these input floors are an important backstop for improving comparability, reducing unwanted variability, and reducing the cyclicality of modelled RWAs. The PRA considers that application of the floors would help ensure a minimum level of prudence, in particular for low default portfolios where data are limited, in the cases where modelling of such portfolios continues to be permitted.

Table 3: Proposed secured LGD floors

The PRA considers that the proposed introduction of the ‘substantially stronger’ category could encourage firms to increase lower risk lending. The PRA considers that the proposed changes are aligned with the Basel 3.1 standards and contain safeguards to prevent regulatory arbitrage. 4.307 The PRA considers that the proposed approach is in line with the Basel 3.1 standards as these include a discretion for national supervisors to require firms using the FIRB approach to calculate effective maturity for all exposures. 4.290 The PRA proposes to align with the Basel 3.1 standards and require firms to use a 12-month fixed-horizon approach for EAD modelling. The PRA considers that there are benefits in standardising the time horizon for EAD modelling domestically and internationally as this would reduce unwarranted risk weight variability. 4.277 The PRA also proposes to introduce an ‘unrecognised exposure adjustment’ to RWAs in order to reflect risks falling outside the scope of IRB approaches for EAD.

• 4.221 The PRA recognises that a consequence of this proposal is that variable scalar approaches, where firms transform point-in-time (PiT) or hybrid rating systems to through-the-cycle (TtC) outcomes, would no longer be permitted.
• As such, the PRA proposes to continue to permit firms to reflect certain support arrangements in IRB obligor rating grade assignments.
• Banks should also consider baseline- and stress-loss outcomes, using the information to reevaluate triggers around risk appetite.
• 4.33 The PRA considers that this is not proportionate and places firms seeking IRB approval (‘IRB aspirants’) at a competitive disadvantage relative to firms with IRB approval.
• The PRA considers that remediation plans should include a clear timetable to bring the model into compliance.
• 4.156 Where non-compliance with modelling standards results in a material understatement of RWAs and/or EL amounts for a particular IRB model, the PRA proposes to require firms to quantify and implement PMAs as an adjustment to RWAs and EL amounts through a PRA Rule.

4.3 The IRB approach permits firms to use internal models as inputs for determining their regulatory risk-weighted assets (RWAs) for credit risk, subject to certain constraints. The Basel 3.1 standards introduce changes to the foundation internal ratings based (FIRB) approach and the advanced internal ratings based (AIRB) approach. 4.301 The PRA has assessed whether the proposals on EAD modelling would facilitate effective competition. The PRA considers that its proposals would reduce RWA variation across firms using the IRB approach, which would facilitate effective competition through a more level playing field between firms. In addition, the PRA considers that its proposals to reduce the complexity and enhance the transparency of its EAD modelling standards would increase the accessibility of the IRB framework, which could be beneficial for firms currently using the SA that are considering applying for IRB permissions.

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4.81 In order to avoid excessive complexity in the capital framework, the PRA proposes that firms would calculate exposure values using the SA methodology (ie net of provisions) for the duration of the transition. The PRA does not propose that firms would be required to calculate any ‘expected loss’ (EL) amounts in respect of exposures subject to the IRB transitional approach. 4.66 In response to these concerns, http://yc-wire-mesh.com/home-for-sale-in-ontario.html the PRA proposes to introduce a number of restrictions on modelling risk weights, consistent with the Basel 3.1 standards, as set out in the paragraphs below. Consequently, the PRA has delayed IRB roadmap submission deadlines for those models that are most likely to be affected by the proposals set out in this chapter to help ensure a co-ordinated and proportionate approach, and to reduce the burden on firms.

The BCBS calibrated the new FIRB LGD value using international empirical data and the PRA does not have any evidence to suggest this is not an appropriate calibration. However, the CRR also sets out a number of exceptions to this requirement, including that the treatment of the guarantees could be reflected in an adjusted obligor grade assignment. 4.219 The PRA considers that the use of continuous rating scales for PD estimation could typically result in lower RWAs than the use of discrete rating scales. This is because total RWAs tend to reduce as the number of grades increases, due to the shape of the IRB risk weight function in respect of PD. While increasing the number of grades could potentially result in more accurate RWAs, the PRA considers that this is only justified where the extra grades result in a genuine increase in risk capture. The PRA also considers that adding additional grades does not increase risk-sensitivity beyond a certain point, and therefore a risk of continuing to allow continuous rating scales for PD estimation is that these reduce RWAs without increasing the overall risk capture of the model.

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4.102 As set out above, the Basel 3.1 standards no longer contain a full use requirement for adopting IRB across roll-out classes. However, the Basel 3.1 standards have introduced a requirement that once IRB has been rolled out to a roll-out class, IRB would be adopted for all exposures within that roll-out class, subject to a materiality exemption. 4.91 Firms’ existing permissions for roll-out and permanent partial use were issued under the CRR. The https://rusimpex.ru/Content_e/TradeServices/sendinfo.php?parloc=main PRA would then vary these permissions using its powers under section 144G of FSMA where necessary, such that the scope of saved permissions would be restricted so that they are consistent with the proposals set out in this section. Firms would then treat any non-compliance in line with the approach set out in paragraph 4.21 and would be able to apply to extend the scope of existing permissions in line with the proposals set out in this section.

• 4.218 The PRA has observed that, for PD estimation, continuous rating scales are used relatively infrequently by firms, and that most firms adopt discrete rating scales in their hybrid mortgage model applications.
• Given the specific nature of exemptions (c) and (d), the PRA does not propose to restrict use of these exemptions.
• 4.126 The PRA considers that the CRR approach is potentially imprudent and could incentivise regulatory arbitrage.
• 4.32 Under the CRR, the PRA approves applications for IRB permissions if, and only if, it considers that all the requirements in the IRB chapter of the CRR are fully met.
• The PRA proposes to introduce transitional arrangements that are in line with the Basel 3.1 standards.