On 12 October 2020, the PRA published Consultation Paper 16/20: Credit risk: The approach to overseas IRB models (CP16/20).
The PRA currently permits the solo capital requirements generated by non-European Economic Area (EEA) internal ratings based (IRB) models (developed to meet non-EEA IRB requirements) to be included in the firms’ UK group consolidated capital requirements. These overseas models may not be fully compliant with all relevant UK IRB requirements as they are designed to comply with non-UK IRB requirements, although the PRA’s criteria seek to ensure a prudent approach.
CP16/20 follows Policy Statement 11/20: Credit risk: Probability of Default and Loss Given Default estimation in which the PRA stated it would clarify its approach on the treatment of overseas models following the end of the transition period on 31 December 2020. It is worth highlighting that until this date, the joint decision process under Article 20 of the Capital Requirements Regulation still applies for EEA models where relevant.
The PRA is clarifying its approach to overseas models built to non-UK requirements as, among other things, the UK is departing the EU and also without a clear approach, firms may need to develop two sets of models to different requirements for the same exposures in situations where this may not be appropriate.
The deadline for comments on CP16/20 is 12 January 2021.
For overseas IRB models built to non-UK requirements that are not currently used for UK consolidated capital requirements, the proposed implementation date for the changes resulting from CP16/20 would be 1 July 2021. For existing overseas IRB models built to non-UK requirements used for UK consolidated capital requirements that meet the proposed criteria, those models can continue to be used for UK consolidated capital requirements. There may be existing overseas models that do not meet the criteria for use of the revised approach from 1 July 2021, and firms may therefore need to remediate these models in order to meet UK IRB requirements. The PRA expects those models that do not meet the proposed criteria to be remediated by 1 January 2023 in line with the planned implementation of Basel 3.1.