PRA publishes second policy statement on Basel 3.1 and proposals for the Strong and Simple capital regime

PRA publishes second policy statement on Basel 3.1 and proposals for the Strong and Simple capital regime

On 12th September 2024, the Prudential Regulation Authority (PRA) issued its second near-final policy statement on Basel 3.1, detailing reforms related to credit risk, the output floor, and reporting and disclosure requirements. This follows the consultation process (CP16/22) and aims to provide clarity on the implementation of the Basel 3.1 standards across the UK financial sector.

The statement, relevant to all PRA-regulated banks, building societies, investment firms, and financial holding companies, outlines updated capital requirements and adjustments in risk-sensitive calculations. The revisions are designed to align with global standards while maintaining the competitiveness of UK firms.

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

These rules will improve the way in which we regulate the banks in order to maintain safety and soundness and wider financial stability. The resulting package will support growth and competitiveness while also ensuring that the UK aligns with international standards.

For further details, see the news release by Sam Woods.

Key changes under Basel 3.1:

• Capital requirements for SMEs and infrastructure exposures:

No increase in capital requirements for small and medium-sized enterprises (SMEs) or infrastructure-related activities.

• Trade finance:

The existing 20% credit conversion factor (CCF) for trade finance will remain unchanged.

• Residential property valuations:

A simpler, risk-sensitive method for valuing residential property is being introduced.

• Output floor:

Adjustments will be made to ensure consistency between the output floor calculation and standardised approaches for firms that do not have model approval.

The PRA has also extended the implementation date for Basel 3.1 to 1 January 2026, with a transitional period ending on 31 December 2029. This decision is intended to "support a smooth implementation of the package" and takes into account feedback from stakeholders and the implementation timelines of other jurisdictions.

Comments from Phil Evans

Phil Evans, Director of the Prudential Policy Directorate at the Bank of England, highlighted the rationale behind the delay:

The decision was made to support a smooth implementation of the package and considered feedback from the consultation as well as the implementation timelines of other jurisdictions.

For more details, you can read Phil Evans’ full speech

Strong and Simple capital regime proposals

In addition to the Basel 3.1 statement, the PRA has released proposals under the Strong and Simple capital regime. This framework aims to simplify capital requirements for smaller institutions, particularly Small Domestic Deposit Takers (SDDTs), while ensuring resilience.

The Strong and Simple framework includes:

• Simplified Pillar 1:

Risk-weighted assets for SDDTs will be calculated using a simplified version of the Basel 3.1 rules.

• Simplified Pillar 2:

The Pillar 2 capital requirements will be streamlined for smaller institutions.

• Single capital buffer:

A consistent and predictable capital buffer will be introduced to make capital management more straightforward for these firms.

The proposed implementation date for the strong and simple regime is 1 January 2027. The consultation on this framework remains open until 12 December 2024.

For more information on the criteria banks and building societies must meet to be able to become SDDTs, you can visit the Bank of England’s dedicated page.

For additional details, you can read the news release on the Basel 3.1 standards and the strong and simple capital regime.

Join Suade’s upcoming webinar for an in-depth analysis of the latest Basel 3.1 regulations.