(3 min read)
On 12 September 2024 the Prudential Regulation Authority (PRA) published the second near-final policy statement and rules covering the implementation of Basel 3.1 standards for credit risk, the output floor, reporting and disclosure requirements in response to consultation paper CP16/22. The policy statement aims to provide firms with clarity regarding their future capital requirements by adopting a more balanced and risk-sensitive approach under the Basel 3.1 framework.
On 12 September 2024 the Prudential Regulation Authority (PRA) published the second near-final policy statement and rules covering the implementation of Basel 3.1 standards for credit risk, the output floor, reporting and disclosure requirements in response to consultation paper CP16/22. The near-final policy statement is relevant to all PRA-regulated banks, building societies, investment firms and financial holding companies (‘firms’).
The PRA estimates that the Tier 1 capital requirements for major UK firms will be virtually unchanged by today’s package, with an aggregate increase of less than 1% from January 2030 when the transitional arrangements come to an end.
The policy statement aims to provide firms with clarity regarding their future capital requirements by adopting a more balanced and risk-sensitive approach under the Basel 3.1 framework. This initiative is expected to bolster financial and economic stability, alongside promoting the growth and competitiveness of the UK, while ensuring compliance with international standards. The introduction of the PRA’s new secondary growth and competitiveness objective has been a key consideration in this process.
The statement considers feedback from 126 written responses received to CP16/22 as well as more than 70 meetings held with stakeholders to discuss their views. Some of the most material changes to the original proposals include:
- Lower capital requirements for small and medium enterprise (SME) exposures.
- Lower capital requirements for infrastructure exposures.
- Lower capital requirements for trade finance-related activities.
- A simpler, more risk-sensitive approach to valuing residential property.
- An adjusted approach to calculating the output floor.
To support a smooth transition 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 four-year transitional period ending on 31 December 2029.
The PRA have also published a wider banking capital package of consultation papers including CP7/24 ‘The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs)’ which sets out proposals that would significantly simplify the capital regime for SDDTs whilst maintaining their resilience. Please see our client briefing here where we discuss these proposals in detail.
