CRR compliance

18.1 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 CRR’s requirements for the IRB approach.

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

18.3 Where material non-compliance is identified and 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.

(CRR Article 144(1))

Drivers of risk

18.4 The PRA expects firms to be able to demonstrate that the model drivers selected offer sufficient discriminatory power and to justify why other potential data sources are not expected to materially improve the discriminatory power and accuracy of estimates.

18.5 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;