UK PRA publishes statement on supervisory benchmarking exercise relating to capital internal models

Background
The supervisory benchmarking exercise for capital internal models has enabled the Prudential Regulation Authority (PRA) to carry out assessments of firms’ internal approaches for calculating own funds requirements. The reporting requirements for this exercise should be updated annually to ensure that the information collected remains relevant for supervisors.

On Tuesday 9 February 2021 the PRA issued a statement to credit institutions in scope of the benchmarking exercise, in response to the differences that had arisen between the intended specifications for the 2021 supervisory benchmarking exercise and the applicable UK legislation. Following the UK’s withdrawal from the European Union at the end of the implementation period on Thursday 31 December 2020, only the specifications for the 2019 credit risk benchmarking exercise continue to be part of applicable law for firms. For the 2021 benchmarking exercise, firms were encouraged to use the draft implementing standards published by the European Banking Authority (EBA) to report credit risk and market risk data, and there was no requirement or expectation to submit IFRS 9 data.

Given the end of the UK’s implementation period for leaving the EU, this statement sets out the PRA’s proposed approach for reporting in relation to the 2022 and 2023 benchmarking exercise. These relate to year-ends 2021 and 2022 respectively.

Statement
As set out in the PRA Rulebook, relevant firms are required to annually report information on their internal approaches to the PRA. The specifications to report this information were included in Commission Implementing Regulations. However, such technical standards are outdated and in relation to market risk are no longer applicable under UK law. As explained below, we intend to prepare and consult on new UK standards for benchmarking purposes.

Firms will not be required or expected to submit any data for the 2022 and 2023 benchmarking exercise. This includes credit risk, market risk and IFRS 9 data.

For IFRS 9, it reflects the fact that no requirement to submit this information has been brought into UK law.

Next Steps
Recognising the end of the UK’s participation in the EBA benchmarking exercise; the upcoming changes to credit and market risk models as a result of the EBA Internal Ratings Based (IRB) roadmap; and the UK’s future implementation of the Fundamental Review of the Trading Book (FRTB), the PRA intends to review the future direction of the exercise.

The PRA will set out any future proposals for a benchmarking exercise in a consultation paper in due course. Firms should expect the market risk benchmarking exercise to resume in line with the UK implementation of FRTB, and the credit risk benchmarking exercise to resume in 2024.

If firms have questions with regard to their planned reporting approach, they should contact their supervisor.

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