The 2025 outlook for firms aspiring to IRB status

Becoming an Internal Ratings Based (IRB) organization has long been an aspirational goal for many banks and building societies. The common primary aim is to demonstrate to the market that the regulator is satisfied with the internal risk capabilities and controls to ensure they meet a recognised global standard.

The benefits

Achieving IRB status enhances the organization’s reputation, lowers funding costs, and attracts prospective investors. However, the journey to meet these standards offers significant benefits beyond reputation. In today’s environment, being a data-driven, agile organization with effective governance provides various commercial advantages, making the organization more appealing to customers and staff.

The rigorous road to IRB

Anyone involved in IRB programs knows that joining this prestigious group is a rigorous, multi-year process. It involves meeting numerous requirements, such as higher data quality standards, specific model developments, thorough embedding, and active senior leadership engagement, including the Board. The goal is to ensure that all these requirements can be effectively evidenced and communicated to the relevant local regulatory body.

However, especially over recent times in the UK, the capacity of the regulator’s technical team to service the needs of aspirant IRB programmes has been limited due to, in part, reforms being made to existing IRB regulation affecting incumbent banks.

Recently, this has included the introduction of enhanced guidelines across the Definition of Default, Probability of Default and Loss Given Default and also, in the UK, the movement to the ‘hybrid’ approach for residential mortgage portfolios from the existing ‘point in time plus buffer’ or ‘variable scalar’ approaches.

IRB organisations have instigated large scale redevelopment programmes to address multiple considerations including changes in rating philosophy, more explicit identification of margins of conservatism, a clearer philosophy to identify downturn periods and greater focus on data capture, in particular days past due identification. Consequently, large volumes of material have, and continues to be, submitted to the regulator for review to comply with the new regulation. This increased workload puts strain on the regulator’s technical teams which can impact on timelines for feedback or approval, with the potential for downstream consequences for the applicants’ programmes.

The light at the end of the tunnel

However, there’s good news on the horizon as we begin to see more model approvals or direct feedback for existing IRB firms being received. This has also resulted in feedback for aspirants’ models starting to filter back to the industry as well. These have contained both areas of support for proposals and targeting deficiencies to be remediated – whether this be data availability or modelling approaches, including the level of complexity. In light of this, 2025 could be the year where IRB application programmes, and model builds, need to be back up to full speed to stay aligned with those also aiming to receive approval across the industry.

While critical, the feedback and approval of the models is only one part of the process. A successful application must also focus on broader aspects, such as governance, embedding into business as usual, target operating models, and senior management education.

Get in touch

If you are considering or progressing with an IRB application and would like to talk to us about any model feedback or wider programme questions please contact us at info@4-most.co.uk.