Skipton Building Society has become one of only a handful of building societies to be awarded internal ratings-based status by the Prudential Regulation Authority.
It means Skipton will be able to self-assess the level of risk on its mortgage portfolios using its own statistical models, which the building society has said will mean better lending decisions.
Skipton has developed its own models that predict the likelihood of a customer going into arrears on their mortgage.
These models also predict how much money the Society would lose if house prices fell and the customer was unable to repay their mortgage.
Andy Nelson, Skipton’s chief financial risk officer, said: “A great deal of hard work has gone in to us achieving IRB. Not only does it mean we are making better informed lending decisions, but we are also focussing on sustaining and safeguarding the society for the benefit of our wider membership.
“Now that we have been awarded IRB we will continue to develop and advance our credit risk management capability even further – ensuring we remain best placed to lend responsibly and appropriately.”
Under the Basel II guidelines, there are two approaches to calculating a capital requirement.
One is a standardised approach where capital varies by loan-to-value and looking at any serious arrears a mortgage customer may be in.
The other approach is the internal ratings based one.
Skipton said its models give it a clearer understanding of how much risk it is exposed to – helping it make better informed lending decisions.
IRB status is also used by ratings agencies to establish whether Skipton has high quality risk management processes and capability.