Emerging & Specific Regulation

Basel 3.13.1

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.

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Overview of Topic

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 modeling of RWAs is unachievable, to mitigate undue RWA fluctuation; and

– Establishing a minimum threshold, which sets a limit on how much the internally-modeled RWAs can deviate below the figures generated through the updated ——Standardized Approaches, thereby minimizing extreme variability and cyclicality in RWAs

Significance in Today's Landscape

The implementation of Basel 3.1 in the EU is proceeding through the banking package. The initial application date, which was originally set for 2022, had to be deferred due to the COVID-19 pandemic. Following the preliminary agreement on June 27, 2023, the trilogue negotiations among the EU Commission, Parliament, and Council have reached a tentative conclusion. Despite the need to finalize numerous technical specifics, there are no remaining obstacles to the EU’s adoption of the Basel 3.1 finalization. The application of CRR 3 is scheduled to commence on January 1, 2025, giving institutions a remaining period of 18 months for implementation.

The BoE intends to move the implementation date of the final Basel 3.1 policies by six months to 1 July 2025. They  intend to reduce the transitional period to 4.5 years to ensure full implementation by 1 January 2030 in line with the proposals set out in CP16/22. To ensure sufficient time is allocated for thoroughly considering the responses to the credit risk and output floor proposals in CP16/22, without causing a delay in publishing rules on other aspects of the package, it is planned to divide the publication of the near-final Basel 3.1 policy statements into two parts:

In the fourth quarter of 2023, the near-final policies on market risk, credit valuation adjustment risk, counterparty credit risk, and operational risk are intended to be published.

In the second quarter of 2024, the publication of the near-final policies on the remaining elements from CP16/22, which include credit risk, the output floor, and reporting and disclosure requirements, is scheduled.

WHO DOES IT IMPACT?

Regulated firms currently under Basel regulation.

Asset Managers
Banks
Fintechs

How Can We Help?

1

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.

2

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.

3

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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