1.1 The Prudential Regulation Authority (PRA) stated in the PRA’s approach to banking supervision that, ‘if a firm is to use an internal model in calculating its regulatory capital requirements, the PRA will expect the model to be appropriately conservative’.

1.2 The purpose of this supervisory statement is to supplement the BIPRU 4 rules and guidance set out in the PRA Handbook by setting out more detailed expectations of firms that have permission to use Internal Ratings Based (IRB) approaches to ensure that their internal models are appropriately conservative.

1.3 This supervisory statement is not intended to provide an exhaustive list of measures firms should take. Responsibility for ensuring that internal models are appropriately conservative rests with firms themselves.

1.4 The PRA recognises that its approach may differ in some respects from that taken by other EEA competent authorities. Where appropriate the PRA will follow the Article 129 process to agree an accommodating and consensual application of the Banking Consolidation Directive ((2006/48/EC) (BCD)) consistent with the principles of home-host regulatory co-operation.

1.5 The statement applies until the implementation of the Capital Requirements Regulation (CRR) on 1 January 2014.