Bank of England (BoE) Prudential Regulation Authority (PRA) Final Basel 3.1 Standards

  • Source: bankofengland.co.uk

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Highlights:

  1. Revised SA for credit risk – https://www.bankofengland.co.uk/prudential-regulation/publication/2022/november/implementation-of-the-basel-3-1-standards/credit-risk-standardised-approach
  2. Revisions to the internal ratings based (IRB) approach for credit risk – https://www.bankofengland.co.uk/prudential-regulation/publication/2022/november/implementation-of-the-basel-3-1-standards/credit-risk-internal-rating-based
  3. Revisions to the use of credit risk mitigation (CRM) techniques
  4. Removal of the use of IMs for calculating operational risk capital requirements, and a new SA to replace existing approaches – https://www.bankofengland.co.uk/prudential-regulation/publication/2022/november/implementation-of-the-basel-3-1-standards/operational-risk
  5. Revised approach to market risk – https://www.bankofengland.co.uk/prudential-regulation/publication/2022/november/implementation-of-the-basel-3-1-standards/market-risk
  6. Removal of the use of IMs for credit valuation adjustment (CVA) risk, replaced by new standardised and basic approaches – https://www.bankofengland.co.uk/prudential-regulation/publication/2022/november/implementation-of-the-basel-3-1-standards/credit-valuation-adjustment
  7. Introduction of an aggregate ‘output floor’ to ensure total RWAs for firms using IMs and subject to the floor cannot fall below 72.5% of RWAs derived under SAs, to be phased in over five years – https://www.bankofengland.co.uk/prudential-regulation/publication/2022/november/implementation-of-the-basel-3-1-standards/output-floor

This consultation is segmented across 13 chapters. PRA has invited responses to 51 questions across Chapters 2 to 9 which are due by 31 March 2023.

These new rules would become effective by 1 January 2025 subject to certain transitional provisions as outlined below.

  1. Output floor – 5 year transitional period beginning 1 Jan 2025
  2. SA and IRB firms for the implementation of the revised treatment of equity exposures in the credit risk SA – 5 year transitional period starting 1 Jan 2025
  3. 5-year transitional period only for the legacy trades that would be exempt from CVA RWAs prior to the application of the new CVA requirements. Banks have the option to irreversibly apply the new CVA requirements to these trades instead.
  4. Banks allowed to apply the SA-CCR reduced alpha multiplier to trades with certain counterparties. Banks are needed to maintain additional Pillar 1 capital equal to the reduction in capital requirements on the proposed implementation date for the legacy trades. The additional capital requirement for the legacy trades would reduce linearly over five years.

PRA will not entertain any review at the end of the transitional period to in order to reduce the speed of convergence with the international standards including avoiding implementation uncertainty for banks.

Download the following documents for more information:

CP16 / 22 – Implementation of the Basel 3.1 Standards

HM Treasury – Implementation of the Basel 3.1 Standards Consultation

CP16 / 22 – Appendix 2: List of Questions

Author

Kishore Ramakrishnan

Kishore Ramakrishnan is Managing Director, Regulatory Change Management for Treliant’s Capital Markets practice. He has over 20 years of global industry and consulting experience across the banking, capital markets, asset, and wealth management businesses. Kishore is a trusted advisor and respected thought leader in the risk, regulation, and compliance domains…