Regulatory Alerts2025-07-01
Guidance on the Internal Ratings-Based Approach for Credit Risk (G2-2025)
The Prudential Authority issued this guidance to clarify the implementation of the internal ratings-based (IRB) approach for credit risk, mandating that IRB banks transition from the advanced to the foundation IRB model for specific asset classes. The document establishes strict credit risk mitigation (CRM) recognition rules, detailing how probability of default and loss given default adjustments must be applied across foundation, advanced, and standardised approaches without altering underlying exposure classifications. Furthermore, it requires banks to classify local government and public sector entity exposures separately from sovereign assets and design through-the-cycle probability models that incorporate idiosyncratic and industry-specific drivers over a 12-month horizon.