On 20 October 2021, the PRA published Policy Statement 23/21 ‘Credit risk: The identification of the nature, severity, and duration of an economic downturn for the purposes of Internal Ratings Based models’ (PS23/21).
PS23/21 is relevant to UK banks, building societies, and PRA-designated UK investment firms. In PS23/21 the PRA sets out final rules and provides feedback to the responses received to Consultation Paper 7/21 ‘Credit risk: The identification of the nature, severity, and duration of an economic downturn for the purposes of Internal Ratings Based (IRB) models’ (CP7/21) which set out proposals to:
- Introduce requirements for identifying an economic downturn as UK Technical Standards and amend the related expectations in Supervisory Statement 11/13 ‘Internal Ratings Based (IRB) approaches’ (SS11/13).
- Make some additional minor changes to SS11/13, mainly to reflect the UK’s withdrawal from the EU and the end of the transition period.
The PRA reports in PS23/21 that it received two responses to CP7/21 and a number of observations and requests for clarification were made. Specific areas where the PRA has amended or clarified the proposals are detailed in Chapter 2 of PS23/21. Among other things the PRA has made amendments to the UK Technical Standards to clarify that in respect of the indicators specified in the instrument, firms must use levels, absolute changes in levels, or percentage changes of levels of economic indicators, depending on which gives the best indicator of economic conditions.
The PRA’s final policy are in the form of:
- New UK Technical Standards (Appendix 1 of PS23/21).
- Updated version of SS11/13 (Appendix 2 of PS23/21).
Located in Appendices 3-5 of PS23/21 are versions of the relevant European Banking Authority guidelines as they stood at the end of the transition period.
The implementation date for the policy changes resulting from this PS will be 1 January 2022.