2.1 The PRA proposes to introduce two complementary expectations on the level of IRB UK mortgage risk weights. The PRA considers models delivering risk weights below these levels are likely to be materially deficient in risk capture:

(i) a risk weight of at least 7% for each individual UK residential mortgage exposure; and

(ii) an exposure-weighted average risk weight of at least 10% for all UK residential mortgage exposures to which a firm applies the IRB approach.

2.2 Both proposals would apply at all levels of consolidation, and cover all UK residential mortgage exposures.

2.3 Assigning risk weights to assets is a crucial part of the prudential capital framework. It is imperative that risk weights are calculated and set prudently to ensure individual firms have sufficient capital for the risks they are exposed to, and to ensure confidence in the risk weight framework itself.

2.4 Residential mortgages represent the largest single asset class held by UK firms and form a material part of many UK firms’ balance sheets. The consequences of imprudent risk weights for UK mortgages are therefore particularly high. Undercapitalisation puts individual firms’ safety and soundness, and therefore UK financial stability, at risk.

2.5 Calculating IRB mortgage risk weights is inherently uncertain. Following detailed analysis over recent years, the PRA has identified the following particular areas of concern: