PRA releases latest CP on Basel 3.1

UK REGULATION

The PRA has released its CP on the last remaining parts of Basel III – the reforms introduced following the financial crisis. To date, changes already adopted have focused on the quality and quantum of capital and on leverage and liquidity. This final part, called Basel 3.1 by the PRA and as Basel IV by some in the industry, is focused on the measure of risk-weighted assets – the base of the capital ratio.

Leading into this, there had been speculation about the degree to which the PRA might align or differ from the BCBS or the EBA’s interpretation as part of its packaged reforms last year . The EBA interpretation (CRD6 and CRR3) is considered a substantial deviation from the Basel III proposals. What is proposed by the PRA aligns closely to the BCBS position.

The reforms cover a range of areas, including, and of particular interest to 4Most and their clients, changes to:

1. the Standardised Approach

2. the Internal Ratings Based Approach

3. credit Risk Mitigation

4. the Output Floor.

Additional changes include a revised approach to Market Risk, removal of internal model approaches for Operational Risk and Credit Valuation Adjustments plus a range of updates to reporting requirements and Pillars 2 and 3.

Alignment to BCBS is not total. There are some changes to the BCBS proposals, but these are likely not to require any significant rework from firms that have already started to investigate the impacts of Basel 3.1 on their business. However, the final capital requirements for each firm will likely be different if any analysis has already been performed. The PRA has proposed a range of more risk sensitive options to their requirements for the Standardised Approach and have included some updated requirements and approaches for IRB firms.

There is some good news for firms currently applying to become an IRB firm – the PRA are proposing to change the compliance requirement with the IRB regulations from “Fully Compliant” to “Materially Compliant” (with caveats around the definition of “materially”,) and the PRA is proposing the introduction of certain “roll-out” exposure classes for which firms can apply to permanently use the Standardised Approach, including all retail exposure classes.

This consultation closes on Friday 31 March 2023. In the meantime, 4most will continue to review the proposal. Please reach out to us if you wish to discuss any of the proposed changes and their potential impact on your business.