The PRA has published Policy Statement 13/17: Residential mortgage risk weights (PS13/17).
In PS13/17 the PRA provides feedback on responses to Consultation Paper 29/16: Residential mortgage risk weights (our blog is here). PS13/17 is relevant to banks and building societies that use the Internal Ratings Based (IRB) approach to calculate credit risk capital requirements for residential mortgages. PS13/17 also contains final amendments to Supervisory Statement 11/13: Internal Ratings Based approaches (SS11/13).
Following its earlier consultation the PRA has made several changes to the proposed amendments to SS11/13. For example:
- the PRA has amended the timetable such that firms should meet the new expectations by the end of 2020. Firms should speak to their supervisors well in advance of this time to agree the date by which they will submit amended models for regulatory approval. In the meantime, applications from firms for IRB model changes based on the previous version of SS11/13 will be considered, provided that the applications include credible plans to implement the revised expectations by the end of 2020;
- paragraph 12.4 of SS11/13 has been amended so that it explains that the cyclicality cap is the PRA’s expectation of what firms should assume is the maximum level of cyclicality when inputting missing historical default rates. If 30% of the change in portfolio default rates comes from grade migration, the remaining 70% would come from changes in default rates within grades. When calibrating the long-run average default rate for a rating grade, the PRA expects firms to assume that at least 70% of the portfolio change in default rate reflects grade level changes in default rates. To illustrate this, a stylised example showing the application of the cap is included in Appendix 2 of PS13/17;
- paragraph 12.13 of SS11/13 has been amended so that it explains that the cyclicality of a rating system is a measure of the degree of responsiveness of the rating system to economic changes; and
- the expectation in paragraph 10.16 of SS11/13 that long-run average probability of defaults are appropriately conservative has been changed to include the more explicit expectation that they should include an appropriate margin of conservatism.
View Residential mortgage risk weights – PS13/17, 19 June 2017