Credit Risk - IRB

The focus is on reducing the complexity of the approaches and improving comparability across firms. However, PRA has decided to take a ‘gold plated’ approach to IRB in some areas where their proposals are more conservative than the Basel standards. This includes the removal of the IRB approach for Sovereigns, more conservative input floors (mortgages), and broader application of the asset value correlation multiplier for financials.

Use of the IRB approach has been restricted for low-risk exposures including, central governments and central banks and equity, where RWAs will be required to be calculated using the Standardised Approach (SA). The Advanced IRB (A-IRB) approach is restricted for exposures to institutions, financial corporates and large corporates, where firms will have to use either Foundation IRB (F-IRB) or SA. The A-IRB or F-IRB approaches are no longer permitted for Income Producing Real Estate.

The PRA will grant firms permission to use the IRB approach if they can demonstrate ‘material compliance’ with UK CRR. This includes permissions for model changes. This is to address a competitive disadvantage for firms aspiring to IRB as firms with permissions already are not required to remediate immaterial non-compliance. Firms can now apply for IRB for some exposure classes while allowing others to remain on the SA. In the past, this mix-and-match approach was not normally allowed.

The PRA has proposed new input floors that generally align with Basel standards, except for the UK residential mortgage portfolio where a more conservative probability of default (PD) floor of 0.1% is applied.