On 14 May 2020, the PRA published Policy Statement 11/20 ‘Credit risk: Probability of Default and Loss Given Default estimation’ (PS11/20).

In PS11/20 the PRA provides feedback to Consultation Paper 21/19 ‘Credit risk: Probability of Default and Loss Given Default estimation’ (CP21/19). In CP21/19 the PRA consulted on proposals to implement the European Banking Authority’s (EBA) regulatory products that relate to probability of default (PD) estimation and loss given default (LGD) estimation. PS11/20 also contains the PRA’s final policy in an updated version of Supervisory Statement 11/13 ‘Internal Ratings Based (IRB) approaches’.

The PRA reports that following feedback received to CP21/19 it has made several changes to its final policy. These are:

  • extending the implementation deadlines for the EBA roadmap and the mortgage hybrid approach, including removing the transitional period outlined in paragraph 2.8 of PRA Policy Statement 7/19: Credit risk – definition of default;
  • amending the approach to discounting cured exposures;
  • accepting temporary divergence between accounting impairment models and approved IRB models for defaulted exposures, due to the need to make timely changes to impairment models; and
  • clarifying the use of Sterling Overnight Index Average (SONIA), including for defaults that occurred before the first date SONIA is available from the Bank of England.

The policy set out in this PS11/20 will take effect from Saturday 1 January 2022.