The Prudential Regulation Authority (PRA) has launched a wide-ranging discussion on proposals to reform how mid-sized lenders calculate capital requirements for residential mortgages. The move is part of broader efforts to support competition and growth in the UK mortgage market while maintaining financial resilience.
A new discussion paper published by the PRA outlines potential adjustments to the internal ratings based (IRB) approach, which allows firms to model their own credit risk capital requirements. This approach is currently more complex and time-consuming than the standardised method, which sets higher average capital requirements and can act as a barrier to entry for smaller firms.
The proposals focus on simplifying the IRB approval process by introducing a “foundation IRB approach” for calculating loss given default (LGD)—the amount a lender expects to lose if a borrower defaults. Under this plan, firms would be able to rely on PRA-set values for LGD rather than developing their own complex models, which can be resource-intensive and a significant hurdle for mid-tier banks.
The PRA is seeking feedback on several issues, including which firms should be eligible for the foundation approach, whether it should differentiate between buy-to-let and owner-occupied mortgages, and if similar reforms could apply to other retail exposures beyond residential mortgages. While firms would still be required to model the probability of default (PD), the PRA is also examining ways to simplify this component of the process.
The discussion comes as part of a broader initiative by the Bank of England to foster resilience and competitiveness in the UK banking sector. This includes the recently announced implementation of Basel 3.1 and the “Strong and Simple” capital regime, aimed at helping smaller firms scale sustainably. These measures are set to take effect from 1 January 2027.
PRA 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.”
The PRA has emphasised that no decisions have yet been made, and it is encouraging firms and stakeholders to contribute views on the potential benefits and trade-offs of each option. Feedback will inform whether any proposals are taken forward to consultation.
Keep up with all the latest FinTech news here
Copyright © 2025 FinTech Global
