On 31 July 2025, the Prudential Regulation Authority (PRA) published Discussion Paper 1/25 – Residential mortgages: Loss given default and probability of default estimation (DP1/25).
Purpose
The purpose of DP1/25 is to open a discussion with industry on how to make it easier for mid-sized firms to compete in the residential mortgage market and sets out a range of options intended to achieve this.
Proposals
DP1/25 seeks feedback on a range of possible policy changes to the treatment of residential mortgage exposures under the internal ratings based (IRB) approach and looks at two IRB components: ‘loss given default’ and ‘probability of default’.
Loss Given Default
The PRA set out that it is considering a ‘foundation IRB approach’. This would allow firms to use PRA-prescribed values for loss given default instead of needing to estimate their own. The PRA explains that the aim of this is to reduce the modelling, time and resourcing required to estimate this, with a view to making it easier for mid-sized firms obtain IRB permission.
Probability of Default
The PRA also sets out a range of policy options intended to address current challenges firms face in designing compliant models for estimating probability of default, including potentially permitting certain simplified approaches for mid-sized-sized firms. The PRA explains that it will consider which of these options, if any, to take forward based on feedback but that it is intended that firms would be able to continue to use models that are complaint with current policy.
Next steps
The deadline for comments on DP1/25 is 31 October 2025.