The UK implementation of the outstanding Basel standards that the UK had not onshored into the UK law as part of the second Capital Requirements Regulation (EU CRR II) is the Basel 3.1 standards.
-
1. What is Basel 3.1?After the global financial crises in 2007-2008, the Basel Committee on Banking Supervision (BCBS) published Basel III regulations and subsequently a series of reforms called Basel III reforms. Consultation paper CP16/22 was published by the UK regulators to cover the parts of Basel III reforms that haven’t been implemented in the UK, with a primary focus on Risk Weighted Assets calculations. These updates are called Basel 3.1 in the UK.
-
2. Why was Basel 3.1 introduced? How does Basel 3.1 affect banks?The Basel 3.1 standards constitute a comprehensive package of proposed measures that would make significant changes to the way firms and banks calculate risk-weighted assets for the purposes of calculating risk-based capital ratios. The proposed changes are designed to improve the measurement of risk in internal models and standardized approaches and reduce excessive variability in the calculation of risk weights, thereby making firms’/banks capital ratios more consistent and comparable.
-
3. Does Basel 3.1 apply to all banks?Basel 3.1 standards impact all UK PRA-regulated banks, building societies, investment firms, and financial holding companies that are incorporated in the UK.
-
4. What are the main objectives of Basel 3.1 regulations?The Basel reforms aim to strengthen bank capital requirements and enhance risk management. With regards to Basel 3.1, they are two-fold (1) improve the robustness of RWAs by improving risk-sensitivity and reducing excessive variability (2) the introduction of output floor to backstop modelled risk weights.
-
5. What is the implementation date for Basel 3.1? Is Basel 3.1 delayed?The PRA delayed the UK implementation start date from 1 January 2025 to 1 July 2025. The implementation date of the final Basel 3.1 policies is 1 July 2025. The transitional period is reduced to 4.5 years to ensure full implementation by 1 January 3030 in line with the proposals of the CP16/22.
-
6. What is CP16/22?
P16/22 is a Bank of England Prudential Regulation Authority (PRA) consultation paper that covers the parts of the Basel III standards that remain to be implemented in the UK. The PRA refers to them as the Basel 3.1 standards. The proposals addressed the final elements of the Basel III standards concerning the measurement of risk-weighted assets (RWAs) – the denominator of risk-based capital ratios. They aim to restore the credibility of RWA calculations by improving the measurement of risk in both the internal models (IM) approaches and SAs, and the comparability of risk measurement across firms. The consultation period ended on 31 March 2023.
There are large number of areas that are impacted:
- a revised standardized approach for credit risk
- revisions to the internal ratings-based (IRB) approach for credit risk
- revisions to the use of credit risk mitigation (CRM) techniques
- removal of the use of internal models for calculating operational risk
- a revised approach to market risk
- the removal of the use of IMs for credit valuation adjustment (CVA) risk
- Introduction of the output floor
- Disclosure changes
-
7. What is PS17/23?
PS17/23 is the Prudential Regulation Authority (PRA) near-final part 1 policy statement (PS) and provides feedback to responses and covers the implementation of the Basel 3.1 standards for market risk, credit value adjustment (CVA) and counterparty credit risk, operational risk, pillar 2, currency denomination and interim capital regime.
The near-final part 2 policy statement is expected to be published in Q2 2024 focusing on the remaining elements of the CP16/2 i.e. credit risk, the output floor, and reporting and disclosure requirements.
-
8. Who is impacted by the PS17/23?PS17/23 is relevant to all PRA-regulated banks, building societies, investment firms and financial holding companies incorporated in the UK. They do not apply to UK banks and building societies that meet the Small Domestic Deposit Taker (SDDT) criteria and choose to be subject to the Interim Capital Regime (ICR).
-
9. What is PS15/23?
The PS15/23 policy statement provides feedback to responses to consultation papers (CP) 4/23 The Strong and Simple Framework: Liquidity and Disclosure requirements for Simpler-regime Firms and CP14/23 – Pillar 3 remuneration disclosure. Regarding the Small Domestic Deposit Takers (SDDTs) criteria, it also provides feedback to responses to CP16/22 – Implementation of the Basel 3.1 Standards and further feedback to responses to CP5/22 – The Strong and Simple Framework: a definition of a Simpler-regime Firm.
It provides the final policy on the definition of (criteria for) the SDDT firms, the liquidity, and disclosures (non-capital) reporting requirements, and remuneration requirements for the SDDT firms.
-
10. Who is impacted by the PS15/23?The PS15/23 applies to PRA-authorized banks, building societies, CRR consolidation entities, and entities prospectively interested in, or currently applying for, authorization as small deposit takers and prospective CRR consolidation entities. It should be of particular interest to firms and CRR consolidation entities that expect to meet the SDDT criteria and SDDT consolidation criteria respectively, and to firms and CRR consolidation entities that would wish to be treated in the same way as those meeting the criteria. Also applicable to firms that expect to meet the criteria for small CRR firms in the Remuneration Part of the PRA Rulebook (small remuneration firms).
-
11. What is interim capital regime?The CP16/22 suggested that firms satisfying the criteria for Small Domestic Deposit Taker (SDDT) be exempt from adhering to the Basel 3.1 standards outlined in the consultation paper. In response to this, the PRA put forward the idea of implementing a Transitional Capital Regime (TCR). In the near-final PS17/23 PRA it updated TCR to 'Interim Capital Regime' - ICR. The ICR would enable SDDTs to continue being governed by the existing CRR until the permanent risk-based capital frameworks for SDDTs come into effect.
-
12. What is Small Domestic Deposit Takers (SDDT)?The PRA decided to rename Simpler-regime Firms to Small Domestic Deposit Takers (SDDTs), and Simpler-regime consolidation entities to SDDT consolidation entities. As set out in PS15/23 – The Strong and Simple Framework: Scope Criteria, Liquidity and Disclosure Requirements, the PRA intends to consult on a simplified capital framework for SDDTs in Q2 2024 (Phase 2 of the SDDT regime). As part of that consultation paper (CP), the PRA intends to propose how the ICR will end when the SDDT capital regime is implemented.
-
13. Is Basel 3.1 the same as Basel III Reforms or Basel IV?Basel 3.1 standards are implemented by the Prudential Regulation Authority (PRA) in the UK. Basel III Reforms or Basel IV will be implemented through the CRR3 framework and will apply to all EU banks.
-
14. Can Wolters Kluwer assist with Basel 3.1 compliance?
Wolters Kluwer OneSumX for Basel enables banks to navigate the complexities of Basel 3.1/Basel IV/Basel III compliance. Our software solutions offer advanced risk management capabilities, regulatory reporting tools, and comprehensive data management systems to ensure banks meet the requirements of Basel 3.1 effectively and efficiently. Contact us to learn how we can support your Basel 3.1 compliance journey.
OneSumX for Basel Solution
Manage the entire process from data integrity and lineage, through to finance and risk management, and into regulatory calculators and reporting.