This follows proposals it announced earlier this month to amend the minimum requirement for own funds and eligible liabilities (MREL) reporting and disclosure requirements.
The discussion paper will examine the factors that influence lenders’ determination of capital requirements for residential mortgages under the internal ratings-based (IRB) approach.
It said any amendments taken forward will be informed by feedback on the discussion paper and result in “less complex regulatory requirements” for firms and speed up the approval process.
The current IRB approach requires firms to model capital requirements for their exposures to credit risk. This is in contrast to the standardised approach, which sets capital requirements for firms and usually has higher average capital requirements for residential mortgages.
The PRA will look at two IRB components: the ‘loss given default’ – how much money a lender expects to lose if a borrower defaults – and the ‘probability of default’ – how likely it is that a borrower will fail to repay a loan.
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Lenders must estimate both for IRB permission.
The PRA is considering a “foundation IRB approach” for the loss given default, to allow lenders to use values prescribed by the regulator for loss given default instead of estimating it.
The regulator said this would reduce the amount of modelling, time and resourcing needed to obtain IRB permission, thus making it easier for mid-sized firms to obtain it.
The PRA will also consider whether it should look beyond residential mortgages and other retail exposures for this approach.
Lenders would still need to model the probability of default, but the PRA is also considering changes to address challenges faced when estimating this.
The regulator said it wanted an open discussion on the costs and benefits of each option and will decide which options, if any, to implement.
David Bailey, executive director for prudential policy at the PRA, said: “Mortgages are one of the most important financial products in the country and among the biggest decisions people make about their finances.
“The options set out in this discussion paper could have a positive impact on competition and growth whilst maintaining an appropriate level of resilience, and result in more people getting access to the finance they need to buy a new home.”
Bailey added: “Once we have feedback to this discussion paper, we will look to take forward the best options to support effective competition among UK lenders.”
