Andrew Bailey Governor, Bank of England | Bank of England
The Prudential Regulation Authority (PRA) has introduced potential measures aimed at facilitating the growth of mid-sized firms in the residential mortgage market. The authority has released a discussion paper to engage with industry stakeholders on these options, which focus on simplifying capital requirement processes under the internal ratings based (IRB) approach.
The discussion paper addresses two key IRB components: 'loss given default' and 'probability of default.' For 'loss given default,' the PRA is considering a "foundation IRB approach," allowing firms to use PRA-prescribed values instead of conducting their own estimates. This change could streamline the process for mid-sized firms seeking IRB permission by reducing modeling and resource demands.
The PRA is soliciting feedback on several aspects, including eligibility criteria for firms, differentiation between buy-to-let and owner-occupied mortgages, and potential application beyond residential mortgages. While firms would still need to model 'probability of default,' the PRA is exploring amendments to assist with this estimation challenge.
David Bailey, Executive Director for Prudential Policy at the PRA, emphasized the significance of mortgages as financial products and highlighted that these options could enhance competition and growth while maintaining resilience. He said, "Once we have feedback to this discussion paper, we will look to take forward the best options to support effective competition among UK lenders."
This initiative aligns with recent announcements from the Bank of England promoting banking resilience and competition. These include an implementation date for Basel 3.1 and a new capital regime for smaller firms starting January 2027, alongside increased thresholds for minimum requirements for own funds and eligible liabilities.
Information from this article can be found here.
