PRA Regulatory Digest - September 2024

The PRA Regulatory Digest is for people working in the UK financial services industry and highlights key regulatory news and publications delivered for the month.
Published on 01 October 2024

Top news and publications

  • PS9/24 – Implementation of the Basel 3.1 standards near-final part 2
  • CP7/24 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs)
  • CP8/24 – Definition of Capital: restatement of CRR requirements in PRA Rulebook
  • CP9/24 – Streamlining the Pillar 2A capital framework and the capital communications process
  • CP10/24 – Updates to the UK policy framework for capital buffers

News and speeches

A balanced approach to finishing Basel 3.1 in the UK – speech by Phil Evans

12 September 2024

The Prudential Regulation Authority has published its near-final Basel 3.1 rules. In this speech, Phil explains why the package of reforms is needed. He also describes the balanced approach the PRA has taken to making substantive changes to some of the biggest issues from the consultation paper, based on feedback from firms. Overall, the package supports the UK’s growth and competitiveness, the resilience of the banking system, and alignment with global standards. 

A balanced approach to finishing Basel 3.1 in the UK − speech by Phil Evans

Prudential Regulation Authority announces review of the leverage ratio requirement thresholds

10 September 2024

The PRA is reviewing the leverage ratio requirement thresholds and is offering a modification by consent, where certain conditions are met, to disapply the relevant part of the PRA Rulebook until the review is complete.

Prudential Regulation Authority announces review of the leverage ratio requirement thresholds

Cross cutting publications and updates

Letter from David Bailey ‘Thematic feedback on accounting for IFRS 9 ECL and climate risk’

27 September 2024

The PRA published a letter to chief financial officers of selected PRA-regulated deposit-takers which provides thematic feedback from the PRA’s review of written auditor reports received in 2024 covering accounting for expected credit losses (model risk & recovery strategies) and climate risk. The letter has been developed with the nature, size and complexity of firms in scope of written auditor reporting in mind. However, we think the findings will be helpful for all firms applying International Financial Reporting Standards (IFRS).

Letter from David Bailey ‘Thematic feedback on accounting for IFRS 9 ECL and climate risk’

Banking publications and updates

PS9/24 – Implementation of the Basel 3.1 standards near-final part 2

This PRA near-final policy statement (PS) provides feedback to responses to the following chapters of consultation paper (CP) 16/22 – Implementation of the Basel 3.1 standards:

  • Chapter 1 – Overview
  • Chapter 3 – Credit risk – standardised approach
  • Chapter 4 – Credit risk – internal ratings based approach
  • Chapter 5 – Credit risk mitigation
  • Chapter 9 – Output floor
  • Chapter 11 – Disclosure (Pillar 3)
  • Chapter 12 – Reporting

This near-final PS also contains feedback to responses on the parts of Pillar 2 relating to the Pillar 2A credit risk methodology, use of internal ratings based (IRB) approach benchmarks, and the interaction with the output floor.

This PS is the second of two near-final PSs related to Basel 3.1. On 12 December 2023, the PRA published the first PS – Near-final PS17/23 – Implementation of the Basel 3.1 standards near-final part 1. It provided feedback to responses to the following policy areas covered in CP16/22: scope and levels of application, market risk, credit valuation adjustment (CVA) and counterparty credit risk, operational risk, and currency redenomination. It also included feedback to responses on Pillar 2 relevant to those areas. Following that publication, the PRA has made some minor clarifications and corrections to the near-final rules published within PS17/23. These have been incorporated into the following parts of the comprehensive Near-final PRA Rulebook instrument, covering all of the Basel 3.1 standards, included in Appendix 2: (i) the Market Risk Parts (Trading Book (CRR) Part, Market Risk: Advanced Standardised Approach (CRR) Part, Market Risk: Internal Model Approach (CRR) Part), (ii) the Credit Valuation Adjustment Risk Part, and (iii) the Counterparty Credit Risk (CRR) Part.

Since the publication of PS17/23, the PRA has continued to monitor the implementation timelines of other jurisdictions and to assess the adequacy of the period between publication of PRA rules and their implementation. Having considered these issues, the PRA has decided to move the implementation date for the Basel 3.1 standards by a further six months to 1 January 2026 with a transitional period of 4 years to ensure full implementation by 1 January 2030 in line with the proposals originally set out in CP16/22.

PS9/24 – Implementation of the Basel 3.1 standards near-final part 2

CP7/24 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs)

12 September 2024

This CP sets out proposals for Phase 2, the proposed simplified capital regime and additional liquidity simplifications for SDDTs. The PRA is proposing to simplify all elements of the capital stack, including Pillar 1, Pillar 2A, buffers, and the calculation of regulatory capital. This CP also proposes to revoke the Interim Capital Regime (ICR), which is a temporary and optional regime that provides SDDT-eligible firms and consolidation entities with the option to remain subject to existing Capital Requirements Regulation (CRR) capital provisions until the capital regime set out in this CP is implemented. The near-final rules for the ICR and ICR consolidation entities are set out in PS9/24.

The PRA considers that the proposals in this CP, together with Phase 1 simplifications, would create a significantly simplified prudential regime for SDDTs with simpler and more straightforward supervisory processes and reporting requirements. Together, the proposals would create a much simpler, more certain, and less costly capital regime for SDDTs which could enhance competition in the UK banking sector and support a dynamic and diverse banking sector in the UK.

This CP should be of interest to PRA-authorised banks and building societies (‘firms’), PRA-designated UK investment firms, and their qualifying parent undertakings, which for this purpose comprise financial holding companies and mixed financial holding companies, as well as credit institutions, investment firms, and financial institutions that are subsidiaries of these firms, regardless of their location.

This CP should be of particular interest to SDDTs, firms who meet the SDDT criteria and are considering becoming an SDDT, firms that anticipate being subject to the ICR, and entities that do business with SDDTs.

This consultation closes on Thursday 12 December 2024.

CP7/24 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs)

CP8/24 – Definition of Capital: restatement of CRR requirements in PRA Rulebook

12 September 2024

Sections 1 and 4 of the Financial Services and Markets Act (FSMA) 2023 provide for the revocation and restatement of financial services assimilated law in secondary legislation. This is to give way to a comprehensive FSMA model of regulation, and means that most firm-facing provisions of the CRR will be replaced by the PRA’s rules.

HM Treasury (HMT) has announced its intention to bring into force the revocation of CRR requirements relating to the definition of own funds. This CP sets out the PRA’s proposed rules to restate, and in some cases modify, these requirements in the PRA Rulebook.

This CP is relevant to banks, building societies, PRA-designated investment firms and PRA-approved, or PRA-designated, financial or mixed financial holding companies. It is not relevant to credit unions or third-country branches.

CP8/24 – Definition of Capital: restatement of CRR requirements in PRA Rulebook

CP9/24 – Streamlining the Pillar 2A capital framework and the capital communications process

12 September 2024

This CP sets out the PRA’s proposal to streamline the Pillar 2A capital framework and capital communications process. This is relevant to all PRA-regulated banks, building societies, designated investment firms, and all PRA-approved or PRA-designated holding companies.

Therefore this CP is also relevant to SDDTs, firms who meet the SDDT criteria and are considering becoming an SDDT, as well as firms that anticipate being subject to the ICR. The PRA has issued a separate consultation, entitled CP7/24 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs), covering proposals on capital-related measures under the Strong and Simple framework. These proposals include simplifications to Pillar 2 for SDDTs, in addition to those proposed in this CP. Please refer to CP7/24 on the specific proposals for SDDTs.

This consultation closes on Thursday 12 December 2024. 

CP9/24 – Streamlining the Pillar 2A capital framework and the capital communications process

CP10/24 – Updates to the UK policy framework for capital buffers

12 September 2024

The Capital Buffers Regulation (CBR) is a piece of assimilated law, retained from the EU, which sets out the statutory framework for the Countercyclical Capital Buffer (CCyB), Capital Conservation Buffer (CcoB), Global Systemically Important Institutions (G-SII) buffer, Other Systemically Important Institutions (O-SII) buffer and the Systemic Risk Buffer (SRB). The PRA and Financial Policy Committee (FPC) implement these buffers in line with their respective responsibilities as set out in the CBR.

Under FSMA 2023, HMT has the power to revoke assimilated law relating to financial services. Under the FSMA 2023 Regulatory Framework, financial services regulators will generally take responsibility for setting the direct regulatory requirements that were previously contained within that assimilated law, acting within a framework set by HM Government and Parliament. This means that detailed regulatory requirements that currently sit within assimilated law, and can currently only be amended by primary or secondary legislation, can move into the regulators’ rules and policy materials, in line with the UK’s model of operationally independent regulators and where they will be easier and less time-consuming to update.

Consistent with this agreed approach, the PRA and HMT are proposing amendments to the UK framework on capital buffers. These amendments would result in some regulatory material on the UK capital buffers framework being removed from the statute book and replaced by PRA policy material.

This CP sets out the PRA’s proposals to streamline some of its policy materials on capital buffers as part of this process, to enhance usability and clarity. These proposals include consequential amendments to, and streamlining of, PRA statements of policy (SoPs), PRA rules that refer directly to the current CBR, and UK Technical Standards (UKTS). In this consultation, the PRA is not proposing changes to its policy approach on the implementation of capital buffers. minor consequential amendments to PRA rules that refer directly to the current CBR.

The CP is relevant to PRA-authorised UK banks, building societies, PRA-designated UK investment firms, and their qualifying parent undertakings, which for this purpose comprise financial holding companies and mixed financial holding companies, as well as credit institutions, investment firms, and financial institutions that are subsidiaries of these firms, regardless of their location. It is also relevant to counterparties of the above-listed entities to the extent that counterparties have financial contracts with such entities governed by third-country law. It is not relevant to credit unions.

This consultation closes on Thursday 12 December 2024. 

CP10/24 – Updates to the UK policy framework for capital buffers

SS3/24 – Credit risk definition of default

12 September 2024

This supervisory statement (SS) sets out the PRA’s expectations in respect of the application of the definition of default.

This SS is relevant to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or PRA-designated financial or mixed financial holding companies (collectively ‘firms’).

SS3/24 – Credit risk definition of default

SS4/24 – Credit risk internal ratings based approach

12 September 2024

This SS sets out the PRA’s expectations in respect of the application of the IRB approach in the calculation of credit risk risk-weighted assets and provides explanation, where appropriate, of the PRA’s expectations when assessing whether firms meet those requirements, including in respect of the conservatism applied. 

This SS is relevant to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or PRA-designated financial or mixed financial holding companies (collectively ‘firms’).

Thematic findings of Internal Audit Review of the Credit Risk Management Framework – non-systemic UK Deposit Takers (UKDT)

10 September 2024

Letter from Laura Wallis to Chief Risk Officers to share the findings of a review, in which we asked the Internal Audit function of a selection of UKDT non-systemic banks and building societies to undertake a review of their Credit Risk Management Framework.

Thematic findings of Internal Audit Review of the Credit Risk Management Framework – non-systemic UK Deposit Takers (UKDT)

More information

Bank Underground – a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England or its policy committees.

Bank Overground – the purpose of Bank Overground is to share our internal analysis. Each bite-size post summarises a piece of analysis that support a policy or operational decision.

Explainers – from interest rates and inflation through to bank failures and financial crises, Explainers uses everyday examples and engaging visuals to bring economics to life.

European and International developments – readers are referred to the following websites: