The Prudential Regulation Authority (PRA) has announced a new series of options that could make it easier for mid-sized firms to “scale-up and compete” in the residential mortgage market.

The regulator is now inviting feedback from the mortgage industry to open a discussion on how best to enhance the market’s competition.

Earlier this month, the PRA published a discussion paper to explore different options that affect how firms can determine capital requirements for residential mortgage loans under the internal ratings based (IRB) approach.

Firms using the IRB approach currently model their capital requirements for their exposures to credit risk. This contrasts with the “standardised approach”, which sets capital requirements for firms, and typically has higher average capital requirements for residential mortgages.

The PRA’s discussion paper is considering two IRB components. The first is “loss given default”, which is how much money a lender expects to lose if the borrower does default, and the second is “probability of default”, which is how likely it is that a borrower will fail to repay a loan. The regulator said firms should estimate both to obtain IRB permission.

Any amendments that the PRA decides to take forward, informed by feedback to the discussion paper, would “represent less complex regulatory requirements for many firms”, the regulator suggested, as well speed up the approval process compared with the current framework.

Executive director for prudential policy at the PRA, David Bailey, commented: “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.

“Once we have feedback to this discussion paper, we will look to take forward the best options to support effective competition among UK lenders.”

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