12 December 2023

The PRA publishes the first of two policy statements for the implementation of the Basel 3.1 standards

Today the Prudential Regulation Authority (PRA) has published the first of two near-final policy statements covering the implementation of the Basel 3.1 standards for market risk, credit valuation adjustment risk, counterparty credit risk, and operational risk.

Today the Prudential Regulation Authority (PRA) has published the first of two near-final policy statements covering the implementation of the Basel 3.1 standards for market risk, credit valuation adjustment risk, counterparty credit risk, and operational risk. The near-final policy statement is relevant to all PRA-regulated banks, building societies, investment firms and financial holding companies (‘firms’).

The near-final policy statement takes account of feedback received to the PRA’s consultation paper (CP) on the Basel 3.1 standards published in November 2022 (CP16/22). The PRA received 126 responses to the CP and had extensive engagement with interested parties during and after the consultation period. As a result, the PRA has adjusted its original proposals in a range of areas to:

• amend the proposals where respondents provided evidence suggesting they did not appropriately and/or proportionately reflect risks,
• facilitate policy implementation where feedback suggested prudent but less burdensome alternative approaches were available,
• enhance the relative standing of the UK as a place for internationally active firms to operate; and
• improve the clarity of rules.

The most material of these adjustments include:

• the removal of market risk internal modelling for the default risk of exposures to sovereigns, aligning the market risk and credit risk frameworks and addressing capital requirements for some sovereigns put forward under the original proposals; and
• added flexibility in the credit valuation adjustment risk framework through the introduction of an additional, optional, transitional arrangement to reduce operational burden on firms.

In CP16/22, the PRA made clear that when introducing Basel 3.1 it intended to avoid any potential double-counting of capital requirements with existing firm-specific Pillar 2 requirements. Today’s publication reaffirms that intention and describes how the PRA will approach it in practice by prioritising adjusting firm-specific Pillar 2 capital ahead of implementation in July 2025.

Based on its latest data, the PRA estimates that the impact of Basel 3.1 requirements will be low and result in an average increase in Tier 1 capital requirements for UK firms of around 3% once fully phased in (ie in 2030). This is lower than the European Banking Authority’s estimate^{footnote [1]} of a Tier 1 increase of around 10% in the EU and the US agencies’ estimate^{footnote [2]} of a CET 1 increase of around 16% for US firms...

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