1.1 The purpose of this supervisory statement (SS) is to provide clarification to firms of the Prudential Regulation Authority's (PRA) expectations in respect of the application of the IRB approach in the calculation of credit risk risk-weighted assets. This SS applies to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or PRA-designated financial or mixed financial holding companies (collectively'firms').

1.2 The Prudential Regulation Authority (PRA) grants permission to use the IRB approach under Rules 1.1 and 1.2, and Articles 143(1) and 143(2A) of the Credit Risk: Internal Ratings Based Approach (CRR) Part of the PRA Rulebook where firms are materially compliant with the requirements of the Credit Risk: Internal Ratings Based Approach (CRR) Part. The purpose of this SS is to provide explanation, where appropriate, of the PRA's expectations when assessing whether firms meet those requirements, including in respect of the conservatism applied.

1.3 Responsibility for ensuring that internal models are appropriately conservative and are compliant with the CRR and PRA rules rests with firms themselves. The PRA's approach to banking supervision [PRA’s approach to supervision of the banking and insurance sectors.] states that'if firms use internal models in calculating their regulatory capital requirements, we expect the models to be appropriately conservative'.

Definitions