Emerging & Specific Regulation

Basel 3.13.1


On November 30, 2022, the Prudential Regulation Authority (PRA) released Consultation Paper (CP) CP16/22, outlining their proposed implementation of the Basel 3.1 standards in the UK. This implementation, slated for January 1, 2025 (with transitional arrangements), includes far-reaching reforms to credit risk, market risk, and operational risk regulations.

These new standards, particularly the extensive changes to credit risk requirements, will significantly reshape the competitive landscape. Firms must strategically review their portfolios to optimize capital utilization. Simultaneously, they’ll need to develop robust and cost-effective compliance solutions to meet the new requirements.


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Is basel 3.1 the same as basel 4? what is basel 3.1 vs crr 3?

The Basel 3.1 standards aim to strengthen the risk-sensitivity of RWA calculations and address the degree of variability observed by the Basel Committee on Banking Supervision (BCBS) in firms’ calculation of RWAs, especially those using internal models. The changes will improve the comparability and credibility of firms’ risk-based capital ratios.

In particular, the proposals would advance the PRA’s primary objective by:

  • Streamlining and narrowing the variety of methods for RWA estimations, which fosters uniform methodology application across companies via simpler and more transparent guidelines;
  • Enhancing the risk awareness of Standardized Approaches within the capital structure, leading to RWAs that better represent the actual risks for firms employing these methods;
  • Restricting the employment of Internal Model approaches in scenarios where robust and cautious modelling of RWAs is unachievable, to mitigate undue RWA fluctuation; and
  • Establishing a minimum threshold, which sets a limit on how much the internally-modelled RWAs can deviate below the figures generated through the updated
  • Standardized Approaches, thereby minimizing extreme variability and cyclicality in RWAs

Basel 4: The term “Basel IV” is often used informally for the above Basel 3.1 reforms. There is no separate, official Basel IV standard.

How Basel 3.1 Differs from CRR3:

  • Scope: Basel 3.1 guidelines are set by the Basel Committee on Banking Supervision (BCBS) and provide a global framework.
  • CRR3: CRR3 (the third iteration of the Capital Requirements Regulation) is the specific European Union (EU) implementation of the Basel 3.1 recommendations.

Key Differences between Basel 3.1 and CRR3:

  • Output Floors: CRR3 introduces output floors, restricting how much banks can reduce their capital requirements using internal risk models. These are more stringent than the BCBS guidelines.
  • Transitional Arrangements: CRR3 includes longer transitional periods for specific elements like unrated corporates and derivatives when calculating the output floor.
  • Credit Risk Approach: CRR3 removes the requirement for the Advanced Internal Ratings-Based (A-IRB) approach for exposures to certain asset classes, instead mandating the Standardized Approach (SA).
  • Important Note: Regulations are complex and can change. It’s always best to refer to official PRA and EU documentation for the most up-to-date and authoritative information.

Key Areas of Differences between Basel 3.1 PRA Implementation & EU:

  • Output Floor
    PRA: The UK has adopted the full Basel 3.1 output floor of 72.5%. Banks cannot have risk-weighted assets (RWAs) calculated through internal models that fall below 72.5% of the RWAs calculated via the standardized approach.
    EU: The output floor is likely to be implemented, but EU member states have some flexibility in setting it below 72.5%. This could result in less stringent capital requirements in some countries.
  • Leverage Ratio
    PRA: The UK is adopting a minimum leverage ratio of 3%, with an additional buffer of 2.5% for G-SIBs (Globally Systemically Important Banks).
    EU: While a leverage ratio is included in the EU’s approach, national authorities have flexibility in setting the buffer requirements, potentially leading to lower requirements for some banks
  • NSFR (Net Stable Funding Ratio)
    PRA: The PRA is adopting the NSFR as proposed in Basel 3.1. This focuses on long-term liquidity health.
    EU: The EU is also expected to adopt the NSFR, ensuring banks maintain sufficient stable funding sources.
  • Emphasis on Supervisory Review (Pillar 2) and Market Disclosure (Pillar 3)
    Both PRA and EU: There’s a consistent emphasis on robust Pillar 2 supervision, allowing regulators to tailor additional capital requirements based on a bank’s specific risk profile. Additionally, both follow Pillar 3’s push for transparency and disclosure.

Why the Differences Matter:

  • Competitiveness: The PRA’s stricter stance, particularly on the output floor, could increase capital costs for UK banks. There’s a concern that this puts them at a competitive disadvantage compared to EU counterparts potentially subject to lower capital requirements.
  • Level Playing Field: The asynchronous implementation (EU rules coming into effect later), along with regional variance within the EU, raises concerns that there won’t be a true level playing field for some time.
  • Financial Stability: While the PRA and EU are trying to strengthen financial stability, the PRA’s slightly stricter approach could arguably offer a slightly greater safety net.

In Summary, the PRA largely aligns with the Basel 3.1 framework, with a few stricter interpretations. The EU takes a broadly similar approach but allows more national discretion, potentially leading to less severe capital requirement increases for some banks.


Basel 3.1: Timelines and what to look out for

January 1, 2025: Target implementation date for the majority of Basel 3.1 reforms globally (this includes the UK).
Ongoing: Many countries and regions, including the UK, are in the process of releasing specific implementation guidelines and timelines within their jurisdictions.


Things to Look Out For:

1. Revised Standardized Approaches: Basel 3.1 overhauls standardized approaches for calculating risk-weighted assets (RWAs) across different risk areas:

Credit Risk: Changes include refined risk sensitivity and new rules for specialized lending exposures.

Operational Risk: A new standardized approach replaces the previous options, aiming to reduce variability in RWA calculations.

Market Risk: Revisions to the Fundamental Review of the Trading Book (FRTB) impact how banks measure market risk.

2. Output Floors:

Purpose: Introduced to limit how much banks can reduce capital requirements through the use of internal models.
Impact: Banks will need to assess the impact of the output floor on their capital positions and potentially recalibrate their reliance on internal models

3. Leverage Ratio Changes:

Revised Treatment: Basel 3.1 modifies the treatment of certain derivatives and off-balance sheet exposures within the leverage ratio calculation.

4. Country/Region Specific Timelines:

While the global target is January 1, 2025, countries and regions (like the UK with the PRA) will publish their own detailed timelines and potentially some adaptations. Stay updated on local regulatory announcements.


Key Actions for Firms

Impact Analysis: Thoroughly assess how the new rules will affect your capital requirements across different areas of risk.
Data & Systems: Basel 3.1 will likely necessitate enhancements to data collection, risk modeling, and reporting systems.
Strategic Planning: Revisit your business model and portfolio mix. Lending decisions and capital allocation strategies will need adjustment.
Communication with Regulators: Engage proactively with your regulators to understand local implementation details and their expectations.

WHO is impacted by Basel 3.1?

  • Internationally Active Banks: Large banks with significant cross-border operations are the main target of Basel 3.1 regulations. These banks are subject to the full scope of the reforms.
  • Domestically Significant Banks: Banks deemed systemically important in their own country are also likely to be subject to Basel 3.1, although potentially with some adjustments based on local regulatory discretion.
  • Banking Groups and Financial Holding Companies: The Basel standards are often applied on a consolidated basis, meaning all the entities within a banking group or financial holding company usually need to comply.
Important Considerations
  • Jurisdiction: While Basel standards are set by the Basel Committee on Banking Supervision (BCBS), the way they are implemented and the exact scope of application can vary across countries. Local regulators will determine which specific banks within their jurisdiction fall under Basel 3.1.
  • Proportionality: Some jurisdictions might adopt a more proportionate approach, applying certain aspects of Basel 3.1 differently or exempting smaller, less complex banks from some of its elements.
  • Subsidiaries: Banks that are subsidiaries of a foreign banking group will often need to adhere to the Basel standards of their parent company’s home country.
Asset Managers

How Can We Help?


Implementation of New Risk Models

Banks need to adapt their internal models to comply with the new standardized approaches and the output floor, which requires significant adjustments in risk modeling and data management systems.


Capital Adequacy Requirements

The new requirements can lead to an increase in the capital banks need to hold, affecting their profitability and business models. Banks must strategically plan to maintain adequate capital ratios under the new rules.


Data Management and Reporting

Implementing Basel 3.1 requires robust data management and reporting systems to ensure accurate calculation of RWAs and compliance with disclosure requirements.

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