Regulatory roadmap: adapting to Basel 3.1 and PRA supervisory shifts at The London RegTech Forum

Ethan Donnelly -

The panel discussion on "Adapting to Basel 3.1 and PRA Supervisory Shifts" provided a detailed analysis of the implications of the forthcoming Basel 3.1 standards and recent changes in the PRA's supervisory approach, with reference to the PRA’s policy release from last month.

Key takeaways:

Basel 3.1: A New Era for Risk Management

    • Basel 3.1 represents a significant overhaul of how banks calculate risk-weighted assets (RWAs), promoting a more consistent and robust approach to measuring credit risk.  
    • The emphasis on the "underlying" standard for risk measurement will require banks to adopt more stringent capital and risk management practices.

To Model or Not to Model:

    • IRB vs Standardised: The panel explored the choice between the Internal Ratings-Based (IRB) approach, which allows banks to use internal models for calculating RWAs, and the standardised approach, which uses fixed risk weights assigned to exposures.
    • PRA's Stance: The PRA encourages the use of models where appropriate, but cautioned that this comes with responsibilities. Banks must ensure accurate calibration and conduct retrospective analysis of their models to guarantee ongoing reliability.
    • Data is King: High-quality, accurate data is fundamental to effective modelling and a key area of focus for firms adopting Basel 3.1.  
    • Global Challenges: The panel discussed how the PRA's approach aligns with and diverges from other regulatory jurisdictions, highlighting the challenges this creates for banks reporting under multiple frameworks.
    • Unified vs Tailored: While unified global regulations offer benefits like simplicity, harmonisation, and ease of understanding, there is also a need for regulations tailored to specific markets and local conditions.
    • Finding the Balance: The panel emphasised the need to strike a balance between these two competing priorities, noting that the ideal approach often depends on the size and global reach of the bank.

PRA's Position:

    • The recent PRA policy release emphasises the importance of consistently applying Basel 3.1 while accommodating jurisdictional nuances.