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In response to today’s publication of key components of the UK implementation of the final Basel 3.1 standards agreed in December 2017, which will enter into force in the UK, in combination with the remaining elements anticipated for publication in the second quarter of 2024, Caroline Liesegang, Head of Prudential Regulation at the Association for Financial Markets in Europe (AFME), said:
“ Today’s publication of near-final policies on key elements of the Basel 3.1 package is a milestone in this regard, particularly for banks that play an important role in financing the real economy. The policies are closely aligned with international standards with some adjustments to improve risk measurement.
“The adjustments include the recalibration of the alpha factor within the standardised approach for counterparty credit risk (SA-CCR). This limits any disproportionate increase in capital requirements for banks and the related impact on end-users' ability to access hedging products to mitigate their risks.
“The PRA has also helpfully adjusted its approach in relation to the default risk of sovereign bonds by removing the inconsistency between the standardised approach and internal models. Under the PRA rules, banks are required to use the standardised approach for central government and central bank exposures. This approach should help in facilitating banks’ continued market making in UK government bond markets in support of the economy.
“However, there was scope for further improvements, for instance, through introducing greater differentiation in the treatment of regulated versus unregulated financial sector entities within the credit valuation adjustment framework. This would have recognised the lower risk of counterparties, such as insurance providers, that play a pivotal role in the real economy. Another example is the lack of recognition of insurance as a risk mitigant in the business indicator calculation in the operational risk framework - an approach that is inconsistent with other areas of the prudential framework and results in an overstatement of risk and disproportionate capital requirements. ...
“In the meantime, it will be important to ensure there is a coordinated timeline for implementing the package internationally, particularly as it relates to market risk standards. Developments in major jurisdictions should also be considered to ensure global consistency and to avoid harming the UK’s competitiveness.”