The proposals will refine the Pillar 2A (P2A) capital framework, and reduce the disparity in capital requirements between the Standardised Approach (SA), mainly used by smaller banks and building societies, and the Internal Ratings Based Approach (IRB).
It said: “The proposals should also contribute to the safety and soundness of firms by reducing incentives for SA lenders to specialise in higher loan-to-value mortgages.”
This follows a commitment made in the PRA’s Annual Competition Report 2016 to address the difference between in risk weights between firms using the standardised approach and firms that use their own models.
The changes mean PRA supervisors will be able to use updated IRB credit risk benchmarks and take in a far broader set of factors when setting P2A capital including balance sheet risks and overall business model.
The PRA also proposes to use the new approach to stave off potential double counting of expected credit losses for SA firms under the new International Financial Reporting Standard (IFRS) 9 which will apply from 1 January 2018.
Sam Woods, deputy governor for Prudential Regulation, said: “This consultation is a major step forward for the PRA in facilitating effective competition, reducing capital requirements for eligible small firms. This will be good for competition and for safety and soundness.”
Economic secretary, Simon Kirby, said: “The Prudential Regulation Authority’s consultation is a positive step in closing the gap between challengers and the big banks. We are determined to put competition at the heart of our financial services so that the sector can truly deliver for consumers and businesses across the UK.”