The PRA has published a discussion paper setting out potential changes to the capital requirements regime for residential mortgages, with the goal of helping mid-sized firms scale and compete more effectively with larger lenders.
The paper focuses on simplifying aspects of the internal ratings based (IRB) approach, specifically ‘loss given default’ and ‘probability of default’—two core metrics that firms must estimate to determine capital requirements under this model. These metrics are used to calculate how much lenders might lose in a default and the likelihood of a borrower failing to repay a loan.
Among the proposed options, the PRA is considering the introduction of a “foundation IRB approach” for loss given default. This would involve prescribing standardised values, reducing the modelling burden for firms and potentially accelerating their IRB approval process. By removing the need for bespoke modelling in this area, the approach could lower the barriers mid-sized firms face when trying to compete with established banks.
The paper also raises questions about how this simplified approach might apply to different types of mortgages—such as buy-to-let versus owner-occupied—and whether its scope could eventually extend beyond residential mortgages to other retail exposures.
While the probability of default would still need to be modelled, the PRA is also seeking input on how to make this part of the process more accessible. The regulator has emphasised that it is not yet committed to any specific proposals but is instead inviting industry stakeholders to weigh in on the benefits and costs of each option.
Prudential Regulation Authority executive director for prudential policy David Bailey said, “Mortgages are one of the most important financial products in the country and among the biggest decisions people make about their finances. The options set out in this discussion paper could have a positive impact on competition and growth whilst maintaining an appropriate level of resilience, and result in more people getting access to the finance they need to buy a new home.”
He added, “Once we have feedback to this discussion paper, we will look to take forward the best options to support effective competition among UK lenders.”
This initiative is part of a broader set of reforms announced by the Bank of England earlier this month, aimed at promoting resilience and competition in the banking sector. These include the rollout of the “Strong and Simple” capital regime for smaller firms and a 1 January 2027 implementation date for most Basel 3.1 standards. The Bank also proposed raising the indicative thresholds for the minimum requirement for own funds and eligible liabilities (MREL) from £15bn to £25bn, another move aimed at giving smaller banks more headroom for growth.
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