Our response to PRA consultation on credit risk: IRB approaches, CP 4/13


The Building Societies Association represents mutual lenders and deposit takers in the UK including all 46 UK building societies.  Mutual lenders and deposit takers have total assets of over £375 billion and, together with their subsidiaries, hold residential mortgages of £245 billion, 20% of the total outstanding in the UK. They hold more than £250 billion of retail deposits, accounting for 22% of all such deposits in the UK. Mutual deposit takers account for 31% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.


1. Do you consider that the draft Supervisory Statement is presented in an appropriately clear manner?

On the whole the statement we believe the statement is presented clearly.  There are some points of detail, however:


1. Included in the consultation is a proposal that firms should maintain a 10% exposure weighted average residential mortgage LGD floor ahead of the implementation of the CRR.  The PRA argues this will mitigate this risk of insufficient capital being held due to over-reliance on firms’ internal models.  This is a sensible interim proposal in our view.

2. The definition of default provided in section 2.1.(6) states this is more 90 days for all material credit obligations. Currently under Basel II, the definition of default for
retail mortgages is 180 days. Basel III, through the CRR, moves to 90 days, but
allows national regulators a discretion for retail mortgages to remain at 180 days. It is our expectation that the PRA will confirm this discretion for retail mortgages definition of default to remain at 180 days in the UK.  But this is not covered in the consultation.  We suggest that this is remedied.

3. Section 8 relates to approval of changes. It would be useful to have an indication of expected approval times from the PRA once a model has been submitted.  

4. Section 8.2e lists the materiality thresholds for approval. It states that capital changes over 1% require pre-notification (except recalibrations).  We believe, however, that the current rules allow for post-notification for any changes that increase capital (unless its a major development such as a brand new model).  Clarification would be helpful.

2. Do you have any further comments on the consolidation of legacy FSA material into a PRA Supervisory Statement?

We welcome the move to consolidate legacy material.   It would have been useful to have had a gap analysis exercise of this PRA consultation paper against previous FSA consultation papers on the IRB approach, to ensure completeness.  We suggest this is carried out for future consultations.

We note that this is the first stage in reviewing the material and that, in due course, the PRA will review the supervisory statement.  Changes may be brought about by relocating parts of BIPRU to the statement and by amendments caused by the implementation of the Capital Requirements Regulation.  Such a review will be a helpful exercise.  Our members will expect to have a sufficiently long period to consider any proposals emanating from the review.  One month’s submission especially over a holiday period, as in this consultation, is too short for meaningful engagement.

29 April 2013

PRA consultation on credit risk: IRB approaches, CP 4/13