BIPRU compliance

6.1 The PRA considers income-producing real estate (IPRE) to be a particularly difficult asset class for which to build effective rating systems that are compliant with the requirements of the IRB approach.

6.2 As with all asset classes, firms should assess whether their IPRE model is BIPRU compliant and not whether it is the closest they can get to compliance given the constraints imposed on their model development (eg lack of data or resource constraints).

6.3 Where material non-compliance is identified that cannot be remediated in a timely fashion, firms should adopt a compliant approach for calculating regulatory capital. In most cases this is likely to be the slotting approach to IPRE set out in BIPRU 4.5.6R.

Drivers of risk

6.4 Firms should be able to demonstrate that the model drivers selected offer sufficient discriminatory power and to justify why other potential data sources are not expected materially to improve the discriminatory power and accuracy of estimates.

6.5 The PRA expects that an IPRE rating system will only be compliant if a firm is able to demonstrate the following in respect of its treatment of cash flows (except where the firm can demonstrate that this is not an appropriate risk driver):

a. the difference in deal ratings when tenant ratings are altered is intuitive;