The mills of the regulators grind slowly, but exceedingly fine. At long last, the UK’s Prudential Regulation Authority (PRA) is embarking on a consultation into meaningful changes to internal ratings-based (IRB) assessments of UK mortgage risk weights, the models by which big banks are able to sidestep the harsher risk weights generated by the standardized approach (SA).
Why does it matter? For two reasons. First, as the regulator notes in its consultation paper (CP14/20, dated 30 September, 2020), the pattern of steadily falling IRB risk-weight outputs in the UK when it comes to mortgage lending raises obvious concerns about whether banks are provisioning cautiously enough.
Since 2014, according to the PRA, the average IRB mortgage risk weight in the UK has fallen from 13% to 10%. This compares to 35% under the SA. The regulator says that it is worried that “some IRB UK mortgage risk weights may not fully reflect the potential for losses in unlikely, but possible, tail scenarios.” That’s because some risk weights go as low as 4% for individual loans.
Its second reason is perhaps more interesting, though. It relates to the PRA’s secondary remit around competition.
