The regulatory landscape for banks and building societies continues to evolve with Basel 3.1 set to make wide-reaching changes to RWA requirements – changes that mean maintaining, or transitioning to, an IRB status will become a more complex challenge than ever before.
For existing IRB firms, this means balancing the need to adhere to the ever-growing list of regulatory changes, whilst being agile enough to realise the benefits from the potential strategic opportunities the new rules create. For the numerous fast-growing challenger banks and building societies, the changes make the timing of any decision to transition to an IRB status much more critical to ensure that the transition is an enabler for growth when taking the next step in the evolution journey.
Firms that are able to navigate this increased complexity will be rewarded by uncovering strategic paths that could lead to significant future capital benefit. This is where we can help you unpick these complexities and open up the paths to allow this future benefit to be realised.
Data and models
What is expected of firms?
- Identify, prepare and store relevant internal and external data for model build activities
- Develop sound, fit-for-purpose PD, LGD and EAD models which comply with EBA and PRA regulatory requirements set out in the CRR, EBA roadmap products and PRA SS11/13 etc.
- Develop and operate model performance testing and monitoring frameworks for IRB models
- Produce comprehensive model documentation which clearly identifies the assumptions, judgements and conservatism applied and evidences regulatory compliance
- Independently validate your internal models on an ongoing basis to verify they are performing as expected and in line with their intended purposes
How can we help?
- Supporting the end-to-end model development process from performing data sourcing and preparation, model build, validation, testing and implementation within the BAU environment
- Developing all types of core credit models, including application and behavioural scorecards, PD (TTC, PiT & Hybrid), LGD, EAD and economic response models, for the full suite of retail and wholesale portfolios
- Providing advanced analytical expertise and senior-level review and challenge over retail and wholesale PD, LGD and EAD modelling methodologies and choices
- Developing a framework for assessing and applying margins of conservatism (MoCs) to your models in line with regulatory expectations
- Independently validating new and existing IRB models in line with best practice standards and latest PRA expectations
Strategy and compliance
What is expected of firms?
- Identify the regulatory requirements relevant to your portfolios, including horizon scanning upcoming and changing regulatory requirements on an ongoing basis
- Understand the key gaps against the vast array of IRB regulatory requirements and the necessary remedial actions
- Determine your modelling strategy and roll-out timelines for IRB migration and identify areas for optimisation
- Establish a detailed yet practical project plan setting out key milestones, dependencies and timelines to achieve IRB accreditation
How can we help?
- Creating and enhancing your framework for providing an annual attestation to the PRA, as required under SS11/13, over how you remain compliant with the IRB regulatory requirements
- Performing a gap assessment to help you understand and establish a well-rooted, practical and achievable timeline for full compliance
- Helping you decide which portfolios should migrate to IRB and when, based on a thorough understanding of your portfolios’ size and composition, business plans, current and future capital requirements and data availability
- Developing and executing a plan to achieve and evidence compliance with all IRB requirements, from models and model use to governance, data and IT
Governance
What is expected of firms?
- Enhance your risk management framework, policies, processes and controls to achieve the level of sophistication required of an IRB firm and comply with the relevant regulatory requirements
- Ensure the Board and senior management are equipped with the knowledge and experience to effectively perform crucial oversight roles in relation to the designated IRB committee, IRB model oversight and overall risk management framework
- Develop and embed a robust IRB governance framework covering model development, validation, monitoring and usage as well as the wider IRB rating system requirements
- Establish an independent review and challenge capability to support IRB model performance, integrity and overall effectiveness
- Embed the use of IRB ratings, loss and default estimates in your end-to-end credit risk management policies and processes
How can we help?
- Promoting a robust culture of review and challenge with key stakeholders and senior management through contributions to your IRB designated committee and/or programme steering committee
- Supporting your adherence with the Senior Managers Regime requirements through articulation of responsibilities and credit risk oversight
- Collaboratively designing a target state for IRB and broader risk management and measurement, governance, policy, process, models, data, and systems
- Developing a fit-for-purpose model risk governance framework and structure
- Advising on, reviewing and/or drafting the suite of required credit risk and model governance policies to ensure that appropriately robust controls are embedded at the heart of your operating model
Regulatory interaction
What is expected of firms?
- Engage with PRA supervisory teams on an ongoing basis to keep up to date with regulatory expectations and requirements
- Communicate effectively with the PRA to indicate your firm’s commitment and readiness to migrate to IRB
- Produce a high quality, credible modular application pack which evidences not only the firm’s understanding and compliance with regulations but demonstrates its risk management maturity, modelling capabilities, strong IRB governance and readiness for migrating to IRB
- Ensure senior management readiness for responding to regulatory scrutiny and interviews
How can we help?
- Facilitating the understanding, interpretation and application of regulatory requirements through our panel of regulatory and technical subject matter experts
- Developing and delivering a tailored training programme to equip the Board and senior management with a strong understanding of your changing IRB framework and regulatory requirements
- Guiding you in developing your regulatory engagement strategy through providing insights from peer firms’ regulatory interactions and feedback
- Supporting the production of the modular PRA IRB application, in addition to helping you in managing, understanding and responding to regulatory feedback
- Undertaking mock challenge sessions to prepare senior stakeholders for regulatory interviews throughout the modular application process
Reporting
What is expected of firms?
- Prepare complete and accurate IRB regulatory reports and disclosures in accordance with the EBA and PRA requirements
- Establish a reporting control framework that is fit for purpose under IRB, with clear responsibilities, hand-offs, processes and documentation
- Develop a framework for capturing and reporting accurate and timely information on model performance to ensure models remain fit for purpose
- Embed the use of IRB metrics as part of credit risk management reporting to provide an evolved view of your portfolios and their performance
How can we help?
- Assisting you in streamlining and automating reporting processes to generate operational efficiencies
- Redesigning your reporting processes as a result of the changed roles in producing credit risk capital outputs, complete with enhanced controls and documentation
- Developing a model monitoring framework including defined metrics, tolerances and thresholds, reporting packs and processes for assessing and investigating results
- Supporting you in understanding, assessing, interpreting and responding to the impacts on regulatory reporting and disclosure requirements as a result of transitioning to IRB
- Helping you to identify key data attributes and system requirements to facilitate timely, complete and accurate internal and external reporting following migration to IRB
Navigating the journey to IRB approval
Has the time come to consider embarking on the journey to IRB? Against the backdrop of a wave of forthcoming regulatory changes – including revised risk weights under the standardised approach – the benefits of IRB can be significant. With the recent adoption of IFRS 9, firms are reaching the level of maturity in models and risk management where the effort to implement IRB is lower than before. Weighing up these costs and benefits is the first step on the IRB journey.
Transitioning to the IRB approach provides opportunities for capital optimisation, competitive advantage and promotes the development of a more sophisticated and robust risk management framework.
With an ever-evolving international regulatory landscape, our team of experienced modellers, technicians, analysts and governance and regulatory specialists can support you in navigating the complex regulatory requirements and determining your optimum strategy for implementing the IRB approach.
- Business case and feasibility assessment
- IRB strategy and programme planning
- Model lifecycle management
- Governance enhancements
- Alignment and embedding of risk management processes
- Regulatory engagement
Business case and feasibility assessment
- What is the strategic and commercial rationale for pursuing an IRB waiver?
- How mature are your existing risk management practices and what are your key gaps against IRB requirements?
- What regulatory capital and profitability benefits could IRB permission provide over the short and medium term?
IRB strategy and programme planning
- How will you segment your portfolios and which will go IRB and when?
- What is your project plan for achieving IRB accreditation and what are the key milestones and dependencies?
- Have you established your Target Operating Model for transformation to an IRB institution?
Model lifecycle management
- What data sourcing and sampling is required to develop robust regulatory capital models to calculate unexpected losses?
- Are your data and IT systems sufficiently robust to support migration to IRB?
- How will you establish a robust yet efficient approach to ensuring models are independently validated?
Governance enhancements
- What governance arrangements need to be established to support your ability to identify, monitor and manage the impacts of model risk in a transparent manner?
- How do your risk appetite framework, policies, procedures and control standards need to be enhanced to support IRB migration?
- How have you implemented a governance process that can effectively manage model risk and continue to adapt to the changing regulatory environment?
Alignment and embedding of risk management processes
- How will you embed advanced analytical capabilities within internal risk measurement and management frameworks across the business?
- How can you utilise IRB metrics to provide management an enhanced understanding of your portfolios and performance?
- What changes are required to data, systems and processes to facilitate reporting under the IRB approach?
- Have you established a BAU operating process, including parallel runs of the full IRB reporting process?
Regulatory engagement
- When should you commence interactions with the PRA?
- How should you approach the production of a credible and robust IRB application in line with the PRA’s modular approach?
- How can you ensure your board and senior executives are appropriately prepared to demonstrate the firm’s readiness for IRB in interactions with the PRA?
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