PwC

January 2021

Benchmarking ‘slotting’

approaches across IRB firms

Specialised lending

PwC

Introduction to slotting approaches

Slotting approaches are being adopted by IRB and Standardised firms

Background

The Capital Requirements Regulation (CRR) specifies the key

factors that should be considered when firms develop ‘slotting

approaches’ for corporate specialised lending. As part of the

wider European Banking Authority (EBA) agenda to reduce

risk-weighted asset (RWA) variability, the EBA has developed

regulatory technical standards (RTS) to specify how these

factors should be considered - including sub-factors and the

interaction of these sub-factors (EBA/RTS/2016/02).

Corporate specialised lending has a number of sub-classes

across project finance, real estate, object finance and

commodity finance. The CRR allows slotting approaches to be

used for these sub-classes where firms are unable to build

reliable and compliant models owing to the scarcity of default

information. Expert judgement forms a fundamental role in

developing slotting approaches that introduces variability.

Purpose of paper

An area of recent EBA regulatory activity, and focus across

firms, surrounds enhancing and developing slotting

approaches for corporate specialised lending. In addition to

meeting Pillar 1 requirements, firms are adopting slotting

approaches for Pillar 2A, stress testing and ICAAP purposes.

Given the spotlight on slotting approaches, the purpose of this

paper is to provide: (1) a summary of current focus areas for

slotting firms; (2) benchmarks of key slotting metrics from the

latest 2020 published Pillar 3s, and (3) key trends of slotting

drivers and outputs over the most recent three-year period as

IRB firms embed the EBA requirements.

Mechanics of slotting approaches

Based on the weightings given to each sub-factor and the

quality of exposure, each exposure is given a slotting category

between 1 and 5, with 1 being the highest quality and 5 being

in default. Firms also leverage internal risk management

practices to perform slotting approach overrides where

necessary.

A risk weight (RW) % is provided by regulation based on

slotting category and residual maturity of the exposure.

An expected loss (EL) % is also provided which is used when

assessing the impact of IFRS 9 provisions and subsequent

capital adjustments (see table 1 for detail).

Current focus areas for slotting firms

A significant focus has been given to the real estate and

project finance sub-classes with firms considering all EBA

sub-factors and amendments following the March 2020 EBA

opinion paper and EC finalisation (see grey box below).

Firms with, or adopting, slotting approaches are working to

meet the CRR, EBA RTS, and Prudential Regulatory Authority

(PRA) SS11/13 requirements for corporate specialised

lending. Such firms are focusing on the following areas:

• Updating exposure classification policies to ensure

corporate specialised lending is defined. To support this,

data collection, systems, model governance and account

management activities are being enhanced.

• Revisiting sub-factor selection and weightings applied to

ensure EBA thresholds are met.

• Fine tuning of category definitions across sub-factors and

better aligning quantitative boundary cuts-offs with risk

appetite. For example, firms are amending credit policies

post COVID-19 and factor thresholds are being revisited.

• The default definition (category 5) is being revisited

to ensure full alignment with the EBA GL/2016/07 and

PRA PS7/19 on default, internal watchlist practices, and

IFRS 9 credit impaired.

• ‘User guides’ are being developed and / or strengthened

to promote consistent application across products in

particular qualitative sub-factors.

• Methodology documentation is being strengthened

through use of expert panels, supporting quantitative

analysis, application of overrides and conservatism.

• Slotting approach monitoring packs are being enhanced

to include metrics such as: category distribution over time;

distribution of quantitative metrics across categories; sub-

factor contribution analysis; and performance of overrides.

• Firms are also developing enhanced validation

frameworks and introducing more quantitative measures.

Regulatory

category

Residual

maturity

RW

%

EL

%

Cat 1 Strong < 2.5 years 50 0.0

Cat 1 Strong >= 2.5 years 70 0.4

Cat 2 Good < 2.5 years 70 0.4

Cat 2 Good >= 2.5 years 90 0.8

Cat 3 Satisfactory All exposures 115 2.8

Cat 4 Weak All exposures 250 8.0

Cat 5 Default All exposures n/a 50.0

January 2021Specialised lending

1

Table 1: summary of RW % and EL % based on slotting

category and residual maturity

EBA Opinion Paper (EBA/Op/2020/06)

In March 2020, the EBA published its opinion on a number

of European Commission (EC) proposed changes to the

RTS on assigning RWs to specialised lending exposures.

The EBA concluded that these proposed changes aim to

provide more flexibility in the slotting framework and do not

significantly alter the existing RTS.

The EC adopted the RTS on 14 December 2020. The

European Parliament / Council now has the opportunity to

object prior to publication in the Official Journal.

Source: CRR Article 153(5) and 158(6)

PwC

Key benchmarks from Pillar 3 analysis

Latest industry risk weights are relatively similar across firms, but expected loss shows

some variability

Benchmarking approach

Our benchmarking approach is based on data gathered from

the Pillar 3 reports published by eight UK IRB firms1 as of April

2020. The slotting exposure amount, RWA, RW %, and EL %

for each of the eight firms is shown in the charts to the right.

For all charts provided, the firms have been presented in order

of total slotting exposure, and corresponding RWAs, per chart

1. From our benchmarking sample, Royal Bank of Scotland

(RBS) is deemed to have the largest total slotting exposure

(£17bn) and associated credit risk RWAs (£11bn), while Co-

op Bank has the smallest (£0.7bn exposure and £0.5bn

RWAs).

Please note that information from any of the sampled firms

that have disclosed Pillar 3 later than April 2020 may differ

from the benchmarks provided. In addition, the Pillar 3

information is provided at ‘slotting’ level so does not

differentiate between real estate and project finance sub-

classes for example.

However, a review of supporting Pillar 3 qualitative

disclosures indicates that the majority of exposure is found

within the real estate sub-class.

Risk weight and expected loss

Our first assessment looks at a breakdown of RW % (chart 2)

and EL % (chart 3) to gain an initial view of the overall outputs

generated by the practices of our sample firms:

• RW %: The range of RW % observed from our sample is

58%-87% with a benchmark simple average of c.75%. Our

analysis shows Principality BS has the highest RW %

(closely followed by Santander UK), whereas HSBC UK

has the lowest RW %. Of note, the four firms with the

largest exposure also have the lowest RW %.

The difference in RW % is primarily driven by the exposure

category distribution and residual maturity profiles of each

firm (see next page).

• EL %: The benchmark simple average EL % is 2.1%,

however there is a higher level of variation in the EL

compared to RW with a range of 1.4%-3.0%.

A key driver of the EL % is the exposure category

distribution, in particular the proportion of assets held

within the highest (riskiest) category 5 as this attracts the

most penal EL %, and to a lesser extent category 4.

The following section helps to explain these divergences

further by breaking down the RW % and EL % into the key

drivers identified above:

a. Slotting category distribution; and

b. Residual maturity distribution.

-

3,000

6,000

9,000

12,000

15,000

18,000

£m

Chart 1: slotting exposure and RWA by firm (£m)

Exposure RWA

1 Benchmark considered all IRB firms with slotting approaches. Firm names not

highlighted in report: LBG, Lloyds Banking Group.

2 Co-Op Bank has been removed from the sample as the EL% data is not available from the latest Pillar 3 report.

January 2021Specialised lending

2

0%

10%

20%

30%

40%

50%

60%70%

80%

90%

100%

Chart 2: RW % by firm

Bank Benchmark AverageFirm

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Chart 3: EL % by firm2

Bank Benchmark Average

1. Firm

PwC

Residual maturity distribution

We have also compared the residual portfolio maturity

across firms, with the split specified in the RW and EL tables

from CRR Article 153(5) and Article 158(6) respectively.

The distribution across this split is a key driver of the overall

RW and EL, with shorter residual maturities attracting the

lowest RW and EL % for categories 1 and 2.

The comparison of the residual maturity profile is shown in

chart 5 below:

Our analysis shows that on average the proportion of

exposures with a residual maturity of less than 2.5 years is

45% and the proportion of exposures with a residual maturity

of greater than or equal to 2.5 years is 55%.

HSBC UK has the largest proportion (64%) of exposures with

less than 2.5 years residual maturity. Since the shorter

maturities attract a more favourable RW for category 1 and 2,

this is another driver of HSBC UK’s lower than average RW %

observed in chart 2 on the previous page.

NBS is a negative outlier with a much larger proportion (69%)

of its slotting exposure having a maturity greater than 2.5

years and therefore not benefiting from the most favourable

RWs / ELs for its category 1 and 2 exposures; this is a driver

for the higher RW / EL % reported.

The final section of this report analyses the trends observed

over the last three years by considering the observed average

EL %, RW %, slotting category profile and residual maturity

distribution for our sample of firms since 2018.

Key benchmarks from Pillar 3 analysis

The majority of slotting assets are held in the lowest risk categories (1 and 2) but have

residual maturities greater than 2.5 years

Slotting category distribution

We have compared the final supervisory slotting category

distributions across the sample firms. This comparison is

shown in chart 4 below:

Our analysis shows that the majority of exposures sit

within the lower risk categories of 1 and 2, attracting a lower

RW and EL %. For our sample firms the benchmark

average proportions were 51% and 40% in category 1 and

2 respectively.

From our sample, HSBC UK has the highest proportion

of category 1 exposures (82%); this is likely to be driving

its lower RW % as seen on the previous page.

Principality BS and Santander UK are negative outliers,

with the lowest observed proportion of category 1 exposures

of 1.5% and 6.8% respectively.

The benchmark average proportion of exposures within the

higher risk categories (i.e. categories 3-5) is 9% with an

average split of 5%, 2% and 2% for categories 3, 4 and

5 respectively, with the latter, category 5, representing the

defaulted assets.

On average, our sample firms hold 2.4% of exposure in the

highest risk category 5. Principality BS and Santander UK are

positive outliers holding only a small proportion of their slotting

exposure in category 5 with 0.7% and 0.8% respectively. This

correlates with the below average EL % observed for these

firms in chart 3 on the previous page.

In contrast, HSBC UK, Nationwide Building Society (NBS) and

RBS are negative outliers holding the largest exposure in

category 5 with 5.5%, 3.7% and 3.5% respectively. This

correlates with the above average EL % observed. Of note,

HSBC UK has the lowest RW % but also has the highest EL

% of the benchmark firms.

3 Co-Op Bank has been removed from the sample as the residual maturity

breakdown is not available from the latest Pillar 3 report.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Chart 4: exposure category profiles by firm

Category 1 Category 2 Category 3 Category 4 Category 50%

10%

20%

30%

40%

50%

60%

70%

80%

Chart 5: residual maturity by firm3

Exposure < 2.5 years Exposure >= 2.5 years

January 2021Specialised lending

3

PwC

Pillar 3 trend analysis

Average slotting exposure and risk weights have remained stable. However, expected

losses have been trending downwards over the most recent three years

Trend Analysis

Our Pillar 3 analysis has also examined the trends observed

over the most recent three-year period from January 2018 to

April 2020. The charts shown to the right summarise the

average slotting exposure, RWA, RW% and EL% observed for

our benchmark sample firms over the last three years of

published Pillar 3s.

Chart 6 shows that since 2018, the overall average slotting

exposure, and correspondingly the average RWAs, have been

trending downwards.

The average slotting exposure has decreased from £9bn in

2018 to £7bn in 2020, a drop of £2bn (c.20%) over the last

three years. The corresponding RWAs have experienced a

similar movement falling by £1.4bn from £6.4bn in 2018 to

£5.0bn in 2020.

Risk weight and expected loss trends

We have also assessed the trends observed for the RW

% (chart 7) and EL % (chart 8) over the last three years.

Based on the averages seen across our benchmark sample

we note the following observations:

• RW %: The average RW% is relatively stable, remaining

between 73%-76% over the last three years.

• EL %: The EL% is trending downwards. Over the last

three years the EL % has reduced by 0.26% (absolute)

from 2.33% to 2.07%. This continues a longer term trend

of a reducing EL %, however the reduction appears to be

slowing in more recent years.

The key driver of this is a reduction of exposure in

category 5 over this period (see chart 9).

The following section explores the trend analysis further by

examining the movements in the average exposure category

distribution and residual maturity profile. 4 Co-Op Bank has been removed from the sample as the EL% data is not

available from the Pillar 3 report.

-

2,000

4,000

6,000

8,000

10,000

2018 2019 2020

£m

Chart 6: average slotting exposure and RWA over last three years (£m)

Exposure RWA

-2.0%▼

1.4%▲

72.0%

72.5%

73.0%

73.5%

74.0%

74.5%

75.0%

75.5%

2018 2019 2020

Chart 7: average RW % over last three years

-0.1%▼

-0.1%▼

1.90%

1.95%

2.00%

2.05%

2.10%

2.15%

2.20%

2.25%

2.30%

2.35%

2018 2019 2020

Chart 8: average EL % over last three years4

January 2021Specialised lending

4

Drivers of trends

At first glance, it could be concluded that slotting exposure

and RWA is on a downward trend potentially representing

a drive for reduced risk for this exposure class. However,

further review of supporting qualitative disclosures

suggests this may not be the case.

Exposure reductions over time have been driven by

securitisation activity, tightening of credit policy and normal

balance attrition at the point of contractual maturity.

However, this is offset by some firms seeing growth across

all years.

As such, continued trends over time will be dependent on

the interplay across the above activities.

PwC

Pillar 3 trend analysis

Industry is seeing an increase in category 1 exposure with offsetting movements across

wider categories, in particular category 5, and a continued move to lower maturity assets

This page considers the changes and trends observed for the

slotting category distribution and residual maturity profile over

the last three years. The charts show yearly averages from

our sample firms (i.e. year on year (YoY) movements).

Slotting category distribution

The change in the average split of exposures across the

supervisory slotting categories has been assessed for the

sample firms, over the last three years. The results are shown

in chart 9 below:

Our analysis shows that the majority of exposure is contained

within category 1 and 2 over the last 3 years. We see an

upwards trend in the proportion of exposure in category 1

offset by a similar reduction in the category 2 (and category 3

and 4 to a lesser extent), highlighting a general shift to higher

quality assets over this period.

The trend for higher quality assets is further supported as the

proportion of exposure in category 5 is trending downwards.

Since 2018 the category 5 exposure has reduced by

approximately a third, with 3.5% of exposure in this category

in 2018 compared to 2.4% in 2020. Category 5 represents

the defaulted assets, attracting a significantly higher EL than

other categories (see table 1).

5 Co-Op Bank has been removed from the sample as the residual maturity

breakdown is not available from Pillar 3 reports.

For 2018, the residual maturity split for HSBC has been extrapolated based

on the split provided in the 2019 Pillar 3 report.

2.1%▲1.4%▲

-0.5%▼-1.5%▼

-1.0%▼ 0.3%▲

-0.3%▼ 0.6%▲

-0.3%▼ -0.8%▼

0%

10%

20%

30%

40%

50%

60%

2018 2019 2020

Chart 9: exposure category profiles YoY

Category 1 Category 2 Category 3 Category 4 Category 5

Residual maturity distribution

We have also assessed the change in the average residual

portfolio maturity for our sample firms across the last three

years. The analysis is shown in chart 10 below:

This analysis shows that in general the residual maturity has

been reducing since 2018. The proportion of exposures with

greater than 2.5 years residual maturity has reduced from

60% to 55% with a corresponding increase in exposures with

a residual maturity of less than 2.5 years.

Our analysis however does suggest that the shift to less than

2.5 years may be slowing. This shift to shorter maturities

provides further support that firms are moving to higher

quality positions.

Collectively, the exposure category and residual maturity

migrations over the past three years are the key drivers to the

downward trend for EL % presented in chart 8.

-4.6%▼ -0.9%▼

0%

10%

20%

30%

40%

50%

60%

70%

2018 2019 2020

Chart 10: residual maturity YoY5

Exposure< 2.5 years Exposure >= 2.5 years

Continuing trends and the impact of COVID-19

The impact of COVID-19 has the potential to disrupt the trends noted above. As we move into 2021 we are likely to see an

increase in assets migrating towards category 5 (default) which will result in a potential upward shift in RW % and EL %.

However, the eventual impact of COVID-19 may be muted. For example, we are noting some firms tighten their credit policy

and risk appetite (including moving to shorter maturities). We are also seeing some non-IRB firms withdrawing from some

slotting sub-classes (in particular real estate) at the risker end owing to the downturn environment. This may provide further

opportunities for established IRB firms, and IRB aspirant firms, to win greater market share and mitigate the impact.

January 2021Specialised lending

5

PwC

Our enablers and tools to support you

How we can help – enablers and tools

We have developed a suite of enablers and tools that can be used to support you in the end-to-end implementation of

regulatory products (including corporate specialised lending and slotting approaches), ensuring compliance with the expected

regulatory requirements.

Track record working with firms

to achieve IRB status

Strong links across IRB firms

bringing latest insights

Access to a large pool of SMEs

across all relevant IRB disciplines

Strong tools across data,

validation and RWA impacts

Work closely with firms on

IRB proportionality

Proven PwC IRB accreditation and

change frameworks used across

IRB and IRB aspirant firms

Gap assessments and

accreditation framework

Expert panel and

slotting build

Slotting approach

benchmarks

PMO and programme

delivery

Data and validation

tools

RWA engine and

scenario tool

Contacts

January 2021Specialised lending

6

1

6 2

5

3

4

PwC

Gemma Shaw

Senior Manager

T: +44 (0)7718 981216

E: gemma.x.shaw@pwc.com

Stefanie Aspden

Senior Manager

T: +44 (0)7483 406519

E: stefanie.l.aspden@pwc.com

Stoyan Yotov

Senior Associate

T: +44 (0)7483 423693

E: stoyan.yotov@pwc.com

Manuele Iorio

Director

T: +44 (0)7718 980479

E: manuel.iorio@pwc.com

Jason Benton

Director

T: +44 (0)7894 231008

E: jason.benton@pwc.com

Craig Luff

Associate Director

T: +44 (0)7889 643501

E: craig.j.luff@pwc.com

PwC

This content is for general information purposes only, and should not be used as a substitute for consultation with professional

advisors.

© 2021 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the UK member firm, and may sometimes refer to the

PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

RITM4088427