Reports on the latest developments in the UK and EU regulatory framework with a focus on banking and finance. See also our additional general financial institutions regulation news and news from other sectors in the links to related materials.
- UK mortgage risk weights based on internal ratings: PRA PS16 / 21
- Basel Reforms: BCBS Report on First Lessons from COVID-19 Pandemic
UK mortgage risk weights based on internal ratings: PRA PS16 / 21
Following consultation in CP14 / 20, the Prudential Regulation Authority (PRA) issued a policy statement, PS16 / 21based on new expectations for internal ratings based on UK mortgage risk weights (IRB). PS16 / 21 provides consultation feedback and sets the final PRA policy in this area in the form of an updated supervisory statement (SS), SS11 / 13: Approaches Based on Internal Ratings (IRB)… The amendments to SS11 / 13 will enter into force on January 1, 2022.
CP14 / 20 respondents generally did not support the proposed minimum expectations for mortgage risk weights applicable to all levels of consolidation and to all UK home mortgage credit risks, including lease purchases. Particular concerns were raised about the proposed minimum expected risk weight of 7% for UK individual mortgages.
In response to feedback, the PRA made two changes to the draft policy in line with the recommendations for:
- it will not introduce a proposed minimum expected risk weight of 7% for individual UK mortgages. Instead, it will take a close look at the calibration of the incoming Probability of Default (PD) and Minimum Loss on Default (LGD) values for mortgages as part of the Basel 3.1 implementation; as well as
- mortgages classified as defaulted will be excluded from the 10% expected minimum risk weight.
The PRA explains that the absence of a minimum expected risk weight for individual UK mortgages would mean that mortgage risk weights below the proposed value would still be allowed. Firms that were affected by the proposal as a result of an increase in their mortgage risk weights and related capital requirements will no longer be affected by this proposal.
Basel Reforms: BCBS Report on the First Lessons of the COVID-19 Pandemic
The Basel Committee on Banking Supervision (BCBS) has published a report, First lessons of the Covid-19 pandemic on Basel reformsproviding a preliminary assessment of the impact of the Basel reforms during the COVID-19 pandemic as part of a broader assessment of their effectiveness.
Overall, the report concludes that improved quality and higher levels of capital and liquidity in the global banking system since the adoption of the Basel III reforms have helped banks cope with the significant impact of the COVID-19 shock, indicating that the reforms have achieved their broad the goal of increasing the stability of the banking system. It also notes that throughout the pandemic, banks continued to lend and provide other important services.
The interim report is part of broader BCBS program of work evaluate his reforms after the global financial crisis. It highlights a number of areas that BCBS intends to continue monitoring. The analysis will be updated and included, if necessary, in a more detailed evaluation report covering the Basel reforms implemented over the past decade. BCBS intends to publish this in 2022 when more data emerges on the impact of the COVID-19 pandemic.