The Prudential Regulation Authority (PRA) has published a discussion paper seeking industry feedback on options to make it easier for mid-sized firms to scale up and compete in the residential mortgage market by reducing complexity in how capital requirements are determined under the internal ratings based (IRB) approach. The PRA is not committing to specific changes at this stage, but indicates that any amendments it takes forward could simplify requirements for many firms and speed up the IRB permission process compared with the current framework. The paper focuses on two IRB components for residential mortgage exposures: loss given default (LGD) and probability of default (PD). For LGD, the PRA is considering a “foundation IRB approach” that would allow firms to use PRA-prescribed LGD values instead of estimating their own, and it asks questions on which firms should be eligible, whether LGD should differentiate between buy-to-let and owner-occupied mortgages, and whether this approach should extend beyond residential mortgages to other retail exposures. Firms would still need to model PD, although the PRA is also exploring amendments to address challenges in PD estimation. Responses to the discussion paper are due by 31 October, after which the PRA will decide whether to take any options forward to formal consultation.
Bank of England 2025-07-31
Bank of England’s Prudential Regulation Authority opens discussion on simplifying IRB mortgage capital modelling for mid-sized lenders
The Prudential Regulation Authority (PRA) has released a discussion paper seeking industry feedback on simplifying capital requirements for mid-sized firms under the internal ratings based (IRB) approach in the residential mortgage market. It explores using a "foundation IRB approach" for loss given default (LGD) with PRA-prescribed values and considers eligibility criteria and scope. The PRA is also examining potential changes to probability of default (PD) estimation.