The PRA consults on proposals for implementation of the Basel 3.1 standards

News release

Today the Prudential Regulation Authority (PRA) has published consultation paper CP16/22 setting out its proposed rules and expectations that cover the parts of the Basel III standards that remain to be implemented in the UK. The PRA refers to them as ‘the Basel 3.1 standards’.

The CP is relevant to all PRA-regulated banks, building societies, investment firms and financial holding companies (‘firms’). The CP also includes revised criteria for determining which firms would be in scope of the future ‘strong and simple’ regime.^{footnote [1]}

The proposals would implement the final package of banking prudential reforms developed by the Basel Committee on Banking Supervision (BCBS) in response to the global financial crisis. It is a comprehensive package of proposed measures that would make significant changes to the way firms calculate risk-weighted assets (RWAs)^{footnote [2]} for the purposes of calculating risk-based capital ratios.^{footnote [3]} The proposed changes are designed to improve the measurement of risk in internal models and standardised approaches and reduce excessive variability in the calculation of risk weights, thereby making firms’ capital ratios more consistent and comparable.

In addition, the proposals would facilitate effective competition by narrowing the gap between risk weights calculated under internal models, which are typically used by the larger firms, and the standardised approaches, through:

• Removal of the use of internal models in some areas for example: operational risk, credit valuation adjustment (CVA) risk;
• Restrictions on the use of internal models in credit risk for portfolios where there is insufficient loss data to reliably model: for example, exposures to large corporates and other financial institutions;
• A more risk-sensitive set of standardised approaches for each risk area (credit, market, operational and CVA risks); and
• Introduction of a new ‘output floor’ to be phased in over five years designed to ensure total RWAs based on internal models cannot fall below 72.5% of RWAs derived under standardised approaches.

The PRA does not expect the proposals set out in this CP to significantly increase overall capital requirements on average across UK firms. The PRA’s proposed implementation date for the changes resulting from this CP would be 1 January 2025, with transitional arrangements that give firms significant time to adjust to the new framework.

Sam Woods, Deputy Governor of Prudential Regulation and CEO of the PRA, said:

“Alignment with strong international banking standards promotes economic growth by underpinning the competitiveness of the UK as a financial centre, supporting investors’ confidence in the UK banking system and ensuring that banks can finance the economy during downturns. Our proposals for implementing the latest Basel standards, with appropriate but limited adjustments for the UK market, aim to deliver these goals. We encourage anyone with an interest to send us their views and evidence.”

Competitiveness, sustainable growth and international standards

The PRA’s proposals take advantage of the flexibility afforded by the UK’s withdrawal from the EU to propose limited adjustments to the Basel 3.1 standards to reflect the specific characteristics of the UK where those could better capture risk and support the competitiveness and relative standing of the UK.

Overall, however, the proposed package aligns with the Basel 3.1 standards. The PRA’s analysis suggests that this approach is consistent with the vast majority of major financial jurisdictions, including for example Australia, Canada, Hong Kong, Singapore and Switzerland. The US has not issued its proposals yet. The European Commission has adopted a different approach so far and its proposals include a number of deviations from the Basel 3.1 standards as part of multi-year transitional arrangements which may be extended subject to further reviews.

By aligning with international standards, the proposed package is designed to support sustainable growth in the wider economy, by underpinning confidence in the banking system, reducing the frequency and severity of financial crises, and ensuring that the banking system is in a strong position to finance recovery during economic downturns, supporting households and businesses.

Next steps

The PRA is keen to receive feedback on these proposals. The PRA has used all evidence it has available in designing its proposals, but welcomes quantitative and qualitative feedback on any aspect of the proposals, where interested parties have additional evidence or insights.

This consultation closes on 31 March 2023 – the consultation period has been extended to four months so that there is sufficient time for respondents to gather and submit data and evidence.

Notes to editors

1. Consultation Paper 16/22: Implementation of the Basel 3.1 standards: 30 November 2022.
2. PRA press release: The PRA proposes revised criteria for determining the scope of firms that would fit in the ‘strong and simple’ framework: 30 November 2022.
3. Risk-weighted assets can be based on estimates of risk determined by firms’ own internal models, or based on parameters set by regulatory authorities in standardised approaches
4. Alongside this CP, HM Treasury is consulting on related aspects such as the proposed revocation of parts of the onshored UK CRR.
5. Basel Committee on Banking Supervision (BCBS): Basel III: international regulatory framework for banks - Basel III: international regulatory framework for banks (bis.org).
6. PRA 21 March 2022 statement - Implementation of Basel standards | Bank of England.