As anticipated in a previous blog, the PRA has now dropped a discussion paper that could be a game-changer for medium-sized firms. After hinting at a desire to reduce barriers to growth, the PRA's new paper, published on 31st July 2025, is a significant step toward making Internal Ratings Based (IRB) accreditation more accessible. The deadline for feedback is 31st October 2025.
This is a welcome development for many firms. We've seen firsthand how the current IRB requirements, particularly the need for extensive historical data, can be a major hurdle. The PRA's proposals aim to address these exact challenges.
In this post, we explore what these changes could mean.
🔎 Key highlights from the PRA’s paper:
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The two key discussions
The paper focuses on two main areas for feedback, both designed to ease the path to IRB status:
#1. Foundation IRB for residential mortgages
This would allow firms to use the PRA’s own prescribed values for Loss Given Default (LGD) and Exposure at Default (EAD) while continuing to use their own internal models for Probability of Default (PD).
💡This is a big deal, as it could significantly reduce the cost, viability, and complexity of the approval process.
#2. Revising PD estimation requirements
The PRA is also looking to amend some of the requirements for Probability of Default (PD) estimation. Currently, firms often struggle to meet the long-term historical data requirements, particularly for demonstrating cyclicality.
💡The changes could help firms that lack a long history of data by offering more achievable approaches.
Our take on the implications
While these are promising developments, they also raise some important questions.
A stepping stone or a final destination?
The "Foundation IRB" is designed as a middle ground between the Standardised and Advanced IRB approaches. We have to consider whether this will be a temporary position on the path to full IRB status, as the PRA has asked, or a permanent solution.
The output floor
The upcoming Basel 3.1 reforms are set to narrow the gap between the Standardised and Advanced IRB approaches through the introduction of an output floor. How this new Foundation IRB will be calibrated in light of these reforms will be a crucial point to watch.
Defining default
One of the most significant challenges we've observed is the variation in how different firms define "default”. The proposed Foundation IRB approach would need to account for these differences to ensure that firms with broader definitions of default don't end up being penalised with higher PDs.
In summary, the PRA's willingness to address the challenges of achieving IRB status is a positive step. Introducing Foundation IRB and making changes to PD estimation could significantly level the playing field, creating greater competition and growth in the mid-tier sector.
What this means for your IRB strategy
Like any regulatory change, success depends on how you respond. Timing, modelling approach, governance readiness — it all matters.
The PRA has requested feedback by October 2025. This is a critical opportunity to shape future capital requirements. We can help you understand these complex proposals, perform a high-level impact analysis to assess the implications and benefits for your firm, and assist in drafting a formal response to the PRA’s discussion paper.
At Jaywing, we’ve worked with a wide range of firms on the end-to-end IRB journey, from developing modelling strategies and managing waiver applications to supporting with governance, validation and regulatory engagement. Our team brings both technical rigour and practical experience across the full credit risk lifecycle.
If you’re thinking about what this means for your IRB strategy, we’d be happy to share our experience.
Or if you still have questions, take a look at our most frequently asked questions below.
🔍 Frequently Asked Questions
What is the PRA proposing in its latest IRB discussion paper?
The PRA is proposing two key changes: a Foundation IRB approach for residential mortgages using supervisory LGD and EAD values, and revised PD estimation requirements to ease the data burden on mid-tier firms.
Who will benefit from the proposed Foundation IRB approach?
Medium-sized firms and new entrants, particularly those without long histories of granular data, stand to benefit most from this simplified route to IRB accreditation.
Does this mean mid-tier firms can now skip straight to IRB?
Not yet. The proposals are still in consultation. However, if adopted, they could provide a more achievable path to IRB for firms currently on the Standardised Approach.
What’s the deadline for responding to the PRA’s proposals?
The discussion paper is open for feedback until 31st October 2025.
How does this relate to Basel 3.1 and the Output Floor?
Basel 3.1 will reduce the gap between Standardised and Advanced IRB via the Output Floor. The calibration of Foundation IRB will need to reflect this, and its interplay will be important to monitor.
Will Foundation IRB be a stepping stone or a permanent status?
The PRA has invited views on whether Foundation IRB should be a transitional phase toward full IRB or a permanent, standalone option.
How can firms prepare for these changes now?
Firms should assess their current model readiness and data capabilities. Engaging early with the proposals — and expert advisors — can help shape a viable strategy.