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    UK Authorities Consult on Implementation of Basel 3.1 Standards

    November 30, 2022

    The UK authorities have published consultations with respect to the Basel requirements for banks. The Prudential Regulation Authority (PRA) published the consultation paper CP16/22 on rules for the implementation of Basel 3.1 standards. The proposals would implement the final package of banking prudential reforms developed by the Basel Committee on Banking Supervision (BCBS) in response to the global financial crisis. The proposed implementation date for the changes resulting from this consultation, other than those affected by transitional provisions for the output floor, would be January 01, 2025. In the context of these changes, PRA also proposed revised criteria for determining the scope of firms that would fit in the "strong and simple" framework. The comment period for both PRA consultations ends on March 31, 2023. In addition, HM Treasury is seeking comments, until January 31, 2023, on the technical and legislative changes necessary to facilitate the PRA implementation of Basel 3.1 standards. The matters being consulted on by HM Treasury will inform the necessary secondary legislation to be laid in Parliament and to come into effect at the same time as the final PRA Basel 3.1 rules.

    The PRA consultation on implementation of Basel 3.1 standards covers parts of the Basel 3 standards that remain to be implemented in the UK. The proposals would, among other things, revise the calculation of risk-weighted assets by improving both the measurement of risk in internal models and standardized approaches, and the comparability of risk measurement across firms. The proposals comprise:

    • revisions to the standardized and internal ratings-based (IRB) approaches for credit risk
    • revisions to the use of credit risk mitigation techniques
    • removal of the use of internal models for calculating operational risk capital requirements, with a a new standardized approach for operational risk to replace the existing approaches
    • revisions to the market risk requirements
    • the removal of the use of internal models for credit valuation adjustment risk, to be replaced by the new standardized and basic approaches
    • the introduction of an aggregate "output floor" to be phased in over five years and designed to ensure total risk-weighted assets derived based on internal models cannot fall below 72.5% of risk-weighted assets derived under standardized approaches

    The proposals would also have consequential impact on the implementation of the leverage ratio as well as on certain elements of the liquidity and large exposures frameworks. PRA does not expect the proposals set out in this consultation to significantly increase overall capital requirements on average across UK firms. The consultation applies to PRA-regulated banks, building societies, investment firms, and financial holding companies. 

    As part of this consultation, PRA is also seeking feedback on the revised criteria for determining which firms would be in scope of the future "strong and simple" regime. PRA is seeking to simplify the prudential regulations for small, non-systemic domestic UK firms while maintaining their resilience through the development of a strong and simple framework. PRA proposes that firms meeting the simpler-regime criteria would not have to apply the Basel 3.1 standards for the calculation of capital ratios. Instead, such firms can choose to enter into a transitional interim regime, known as the Transitional Capital Regime, which is substantively the same as the existing regime under the Capital Requirements Regulation (CRR). PRA intends to consult on the first batch of measures that will apply to simpler-regime firms in early 2023 as well as to consult separately on simplifying the remuneration requirements for material risk-takers at small firms; these are remuneration requirements that were introduced as part of the Capital Requirements Directive V and apply additional remuneration rules to material risk-takers at these firms (versus the previous UK regime).

     

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    Keywords: Europe, UK, Banking, Basel, Basel 3.1, Credit Risk, Market Risk, IRB Approach, Standardized Approach, Strong And Simple Framework, Regulatory Capital, Operational Risk, CVA Risk, HM Treasury, PRA

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