Basel 3.1 – UK Regulatory Reporting

CP16/22 – Implementation of the Basel 3.1 standards

At the end of November 2022, the Prudential Regulation Authority (PRA) published a Consultation Paper 16/22 (CP16/22) proposing the implementation of Basel 3.1 standards with responses requested by Friday 31st March 2023.

CP16/22 – Implementation of the Basel 3.1 standards | Bank of England

This Consultation Paper (CP) covers the parts of the Basel III standards that remain to be implemented in the UK whilst many of the Basel III standards have already been implemented in the UK through the legislation onshored as part of the UK’s exit from the EU.

Key areas affected:

Credit Risk – Standardised Approach – The proposed changes include a more risk-sensitive approach to residential mortgage lending, revisions to the risk weights for corporate exposures including to SMEs, the introduction of specific treatments for ‘specialised lending’ exposures, removal of implicit assumptions of sovereign support for exposures to banks, changes to the risk weights for equity exposures, changes to off-balance sheet conversion factors, and proposed due diligence requirements for use of external credit ratings.

Credit Risk – Internal ratings based approach – The proposed changes include restrictions on the use of IRB for equities and low default portfolios, such as exposures to banks and other financial institutions, large corporates, and sovereign exposures. Other proposals include changes to the risk parameters used in IRB modelling, including new input floors for probability of default (PD), loss given default (LGD) and exposure at default (EAD), and greater specification of parameter estimation practices to reduce variability in RWAs for portfolios where the IRB approaches remain available.

Credit Risk Mitigation – Changes for both funded and unfunded credit protection, in addition there are proposed amendments to the PRA’s expectations with respect to CRM introduction greater clarity.

Market Risk – the introduction of three new approaches to replace the current methodologies: the simplified standardised approach (SSA) for firms with small or simple trading activities; the advanced standardised approach (ASA), a risk-sensitive approach for firms without permission to use an IM; and the internal model approach (IMA). The proposals would also retain the existing derogation for small trading book business, which permits firms with very limited trading activity to use the credit risk approach to measure market risk.

Credit valuation adjustment and counterparty credit risk – the introduction of three new approaches for calculating the CVA risk capital requirement: the fall-back alternative approach (AA-CVA); the basic approach (BA-CVA); and the standardised approach (SA-CVA). The new CVA framework and methodologies are proposed to replace the current calculation methodologies. The proposals would also adjust the calibration of the standardised approach for counterparty credit risk (SA-CCR) where the PRA considers it to be overly conservative, and remove certain existing exemptions from CVA capital requirements for transactions that the PRA considers have material CVA risk.

Operational risk – The new operational risk capital framework aims to help ensure that firms maintain sufficient financial resources to mitigate the risk of loss due to inadequate or failed internal processes, people or systems, or from external events. The new operational risk framework is proposed to replace the existing methodologies.

Output floor – The PRA plans to implement the Basel 3.1 standards for the output floor with respect to firms’ calculation of RWAs, which would limit the RWA reductions available to firms through their application of IMs.

Disclosure (Pillar 3) – The PRA plans to update the UK Pillar 3 disclosure requirements to reflect the proposals set out elsewhere in this CP. The proposals aim to align the Pillar 3 disclosures of UK firms to the Basel 3.1 standards for Pillar 3 disclosure requirements.

Reporting – Plans to align PRA supervisory reporting requirements with the proposals set out elsewhere in this CP.

Currency redenomination – Plans to change certain Euro (EUR) and US Dollar (USD) references to Pound Sterling (GBP).

Samuel Welford-Smith 

Senior Sales Executive