On 14 May 2020, the PRA published Policy Statement 12/20 ‘Responses to Occasional Consultation Paper 25/19 – Chapter 5: Retirement interest-only (PS12/20).
Chapter 5 of Consultation Paper 25/19 ‘Occasional Consultation Paper’ (CP25/19) set out proposals to address potential inconsistencies in practices across firms in relation to the capital treatment of retirement interest only (RIO) mortgages.
In CP25/19 the PRA proposed:
- the circumstances in which firms should classify conversions of exposures to RIO mortgages as being distressed restructuring;
- the conditions for defaulted interest-only (IO) mortgages to return to non-defaulted status following conversion to a RIO mortgage; and
- that firms should be able to demonstrate the appropriateness of the treatment of IO mortgages that are converted into RIO in their Internal Ratings Based (IRB) models through robust analysis.
After considering the responses to CP25/19, the PRA has decided to maintain the proposals as consulted, but has provided additional clarification by updating:
- Supervisory Statement 11/13 ‘Internal Ratings Based (IRB) approaches’; and
- Supervisory Statement 10/13 ‘Credit risk – standardised approach’.
The policy presented in PS12/20 will take effect on 1 January 2022, in order to align with the proposed implementation date of the European Banking Authority guidelines on the definition of default, as set out in PRA Policy Statement 11/20 ‘Credit risk: Probability of Default and Loss Given Default estimation’.