Regulator seeks industry input on plans to ease entry for mid-sized firms
The Prudential Regulation Authority (PRA) has released a discussion paper outlining potential changes aimed at helping mid-sized firms expand their presence in the UK residential mortgage sector.
The regulator is inviting feedback from industry stakeholders on a range of options that could simplify how these firms calculate capital requirements for mortgage lending.
If adopted, the PRA’s proposals could lower barriers for mid-sized lenders, allowing them to compete more effectively with larger banks. This may increase competition, potentially leading to more mortgage options and better rates for consumers. Simplified capital rules could also speed up product approvals and encourage innovation. However, the PRA aims to balance these benefits with the need to maintain financial stability.
The discussion paper, published today, examines possible amendments to the internal ratings based (IRB) approach, which currently allows firms to model their own capital requirements for credit risk. This approach differs from the standardised method, which sets fixed capital requirements and typically results in higher average requirements for residential mortgages.
Key areas under review include the calculation of ‘loss given default’ — the amount a lender expects to lose if a borrower defaults — and ‘probability of default’, which measures the likelihood of a borrower failing to repay a loan. The PRA is considering a “foundation IRB approach” for loss given default, which would let firms use regulator-set values instead of their own estimates. This change could reduce the complexity and resources needed for mid-sized firms to gain IRB approval.
The regulator is also seeking views on which firms should be eligible for this approach, whether it should distinguish between buy-to-let and owner-occupied mortgages, and if it should be extended to other types of retail lending. While firms would still need to model probability of default, the PRA is exploring ways to address difficulties firms face in this area.
The PRA emphasised that it is not endorsing any specific option at this stage and will decide which proposals to move forward based on industry feedback.
“Mortgages are one of the most important financial products in the country and among the biggest decisions people make about their finances,” said David Bailey, PRA executive director for prudential policy.
“The options set out in this discussion paper could have a positive impact on competition and growth while maintaining an appropriate level of resilience, and result in more people getting access to the finance they need to buy a new home. 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 proposals follow recent announcements from the Bank of England on measures to boost banking sector resilience and competition. These include a January 1, 2027 implementation date for most of Basel 3.1 and the introduction of the Strong and Simple capital regime for smaller firms. The central bank has also raised the indicative thresholds for the minimum requirement for own funds and eligible liabilities, increasing the range from £15-25 billion to £25-£40 billion in total assets, to offer more clarity and flexibility for mid-sized lenders.
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