Banking and finance regulatory news, July 2021 #2

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Hogan LovellsReports on key UK and EU recent regulatory developments focussing on banking and finance. See also our supplementary Financial institutions general regulatory news and other sector news in the Related Materials links.

Contents

  • Internal ratings based UK mortgage risk weights: PRA PS16/21
  • Basel reforms: BCBS report on early lessons from COVID-19 pandemic

Internal ratings based UK mortgage risk weights: PRA PS16/21

Following its consultation in CP14/20, the Prudential Regulation Authority (PRA) has published a policy statement, PS16/21, on new expectations on internal ratings based (IRB) UK mortgage risk weights. PS16/21 gives feedback to the consultation and sets out the PRA's final policy in this area in the form of an updated supervisory statement (SS), SS11/13: Internal Ratings Based (IRB) approaches. The amendments to SS11/13 will take effect from 1 January 2022.

Respondents to CP14/20 were generally not in favour of the proposed minimum expectations on mortgage risk weights applying to all levels of consolidation and to all UK residential mortgage exposures, including buy-to-let. Particular concerns were raised about the proposed 7% risk weight minimum expectation for individual UK mortgage exposures.

In response to the feedback, the PRA has made two changes to the draft policy as consulted on:

  • it will not introduce the proposed 7% minimum risk weight expectation on individual UK mortgage exposures. Instead, it will carefully consider the calibration of the incoming probability of default (PD) and loss given default (LGD) parameter floors for mortgage exposures as part of its implementation of the Basel 3.1 standards; and
  • mortgage exposures classified as in default will be excluded from the 10% average minimum risk weight expectation.

The PRA explains that not introducing the minimum risk weight expectation on individual UK mortgage exposures will mean those mortgage risk weights below the proposed value will continue to be permitted. Firms that would have been impacted by the proposal through increases to their mortgage risk weights and corresponding capital requirements will no longer be impacted by it.

Basel reforms: BCBS report on early lessons from COVID-19 pandemic

The Basel Committee on Banking Supervision (BCBS) has published a report, Early lessons from the Covid-19 pandemic on the Basel reforms, giving a preliminary assessment of the impact of implemented Basel reforms during the COVID-19 pandemic, as part of a broader evaluation of their effectiveness.

Overall, the report finds that the increased quality and higher levels of capital and liquidity in the global banking system since the adoption of the Basel III reforms helped banks absorb the significant impact of the COVID-19 shock, suggesting that the reforms have achieved their broad objective of strengthening the resilience of the banking system. It also notes that throughout the pandemic, banks continued to lend and provide other critical services.

The interim report is part of the BCBS's broader work programme to evaluate its post-global financial crisis reforms. It highlights a number of areas that the BCBS intends to continue to monitor. The analysis will be updated and included, as relevant, in a more comprehensive evaluation report covering the Basel reforms implemented over the past decade. The BCBS intends to publish this in 2022 as additional data on the impact of the COVID-19 pandemic becomes available.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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