UK regulator issues guidance for Basel 3.1 implementation
12 December 2023 UK
Image: AdobeStock/William
The Prudential Regulatory Authority has issued a statement providing guidance on how it will implement Basel 3.1 standards for evaluating risk-based capital requirements.
This “near-final” policy statement responds to feedback advanced by the market on the regulator’s consultation paper on Basel 3.1 standards that was circulated in November 2022 (CP 16/22).
This statement addresses the implementation of Basel 3.1 standards for market risk, credit risk, operational risk and credit valuation adjustment risk. It will apply to all PRA-regulated entities including banks, building societies, investment firms and financial holding companies.
The PRA’s consultation process on CP 16/22 attracted feedback from 126 respondents.
The regulator has adjusted its original proposals in areas where the market has suggested that “prudent but less burdensome” mechanisms are available for implementing the 3.1 rules or where the proposals in CP 16/22 do not align with the risks borne by firms falling into scope of the regulation.
Specifically, this will remove use of market risk internal modelling methodologies for evaluating the default risk of a sovereign issuer, with steps to bring market risk into line with credit risk assessment frameworks.
These amendments will also offer greater flexibility in credit valuation adjustment risk frameworks available to in-scope firms.
More broadly, these changes are designed to bring greater clarity to the UK implementation of the Basel 3.1 rules and to enhance the UK’s status as a place for internationally active firms to operate.
In CP 16/22, the PRA emphasised that it aims to avoid any double-counting of capital requirements, under Basel 3.1 and existing firm-specific Pillar 2 requirements, when introducing Basel 3.1 provisions.
The regulator estimates that the impact of Basel 3.1 requirements will be relatively small, resulting in an increase in average Tier 1 capital requirements of close to three per cent for UK firms when these are fully adopted in 2030. This is lower than previous estimates forwarded by the European Banking Authority, the PRA concludes.
Today’s publication also includes the Interim Capital Regime (ICR) rules relating to market risk and operational risk.
The PRA intends to publish its second near-final policy statement in Q2 2024. This will focus on the remaining elements of the Basel 3.1 package, including credit risk, the output floor, reporting and disclosure requirements.
The implementation of Basel 3.1 standards in the UK is targeted for 1 July 2025, subject to a 4.5-year transitional period ending on 1 January 2030.
Sam Woods, deputy governor of prudential regulation and CEO of the PRA, says: “The rules published today implement the latest Basel standards in the UK and include appropriate adjustments to take on points raised by respondents to our consultation.
“The focus of these rules is not on the aggregate amount of capital in the system but on making sure that risk is properly captured across a range of firms and activities.”
This “near-final” policy statement responds to feedback advanced by the market on the regulator’s consultation paper on Basel 3.1 standards that was circulated in November 2022 (CP 16/22).
This statement addresses the implementation of Basel 3.1 standards for market risk, credit risk, operational risk and credit valuation adjustment risk. It will apply to all PRA-regulated entities including banks, building societies, investment firms and financial holding companies.
The PRA’s consultation process on CP 16/22 attracted feedback from 126 respondents.
The regulator has adjusted its original proposals in areas where the market has suggested that “prudent but less burdensome” mechanisms are available for implementing the 3.1 rules or where the proposals in CP 16/22 do not align with the risks borne by firms falling into scope of the regulation.
Specifically, this will remove use of market risk internal modelling methodologies for evaluating the default risk of a sovereign issuer, with steps to bring market risk into line with credit risk assessment frameworks.
These amendments will also offer greater flexibility in credit valuation adjustment risk frameworks available to in-scope firms.
More broadly, these changes are designed to bring greater clarity to the UK implementation of the Basel 3.1 rules and to enhance the UK’s status as a place for internationally active firms to operate.
In CP 16/22, the PRA emphasised that it aims to avoid any double-counting of capital requirements, under Basel 3.1 and existing firm-specific Pillar 2 requirements, when introducing Basel 3.1 provisions.
The regulator estimates that the impact of Basel 3.1 requirements will be relatively small, resulting in an increase in average Tier 1 capital requirements of close to three per cent for UK firms when these are fully adopted in 2030. This is lower than previous estimates forwarded by the European Banking Authority, the PRA concludes.
Today’s publication also includes the Interim Capital Regime (ICR) rules relating to market risk and operational risk.
The PRA intends to publish its second near-final policy statement in Q2 2024. This will focus on the remaining elements of the Basel 3.1 package, including credit risk, the output floor, reporting and disclosure requirements.
The implementation of Basel 3.1 standards in the UK is targeted for 1 July 2025, subject to a 4.5-year transitional period ending on 1 January 2030.
Sam Woods, deputy governor of prudential regulation and CEO of the PRA, says: “The rules published today implement the latest Basel standards in the UK and include appropriate adjustments to take on points raised by respondents to our consultation.
“The focus of these rules is not on the aggregate amount of capital in the system but on making sure that risk is properly captured across a range of firms and activities.”
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