Basel 3.1: PRA eases capital requirements and delays until 2026

On September 12, the regulator published policy statement 9/24 – setting out near-final UK rules on implementing the Basel 3.1 reforms. The first set of rules were issued in December 2023. The latest policy statement had two core takeaways; reduces capital requirements for certain sectors and a six-month implementation delay to 1 January 2026, with a transitional period of four years ensuring full implementation of rules by January 2030.

In this article we focus on the key changes to:

• Credit risk: internal ratings-based (IRB) approach
• Credit risk mitigation
• Output floor
• Pillar 2
• Disclosures – Pillar 3
• Market risk
• Credit valuation adjustment

We discuss credit risk – standardised approach further here.

On the Strong and Simple regime, the PRA has published CP7/24, aiming to simplify the capital requirements for Small Domestic Deposit Takers (SDDTs) while maintaining their resilience. We discuss this further here.

Capital requirements, lending and competition, and timelines

Capital requirements

The PRA estimates that Tier 1 capital requirements remain largely unchanged by final rules, with total increase less than 1%. However, firms will need to assess the impact for their own business model, portfolio, and products as average impacts can be misleading.  

Pillar 2A infrastructure and SME lending adjustments will offset Pillar 1 impact of removing support factors.

More proportionate risk weights for some asset classes like unrated corporates, commercial real estate loans to SMEs.

New risk sensitivity in standardised approaches and output floor will limit capital benefits of IRB models.

Lending and competition

There’s limited expected impact on pricing/availability of infrastructure and SME lending due to new Pillar 2A adjustments.

More level playing field between SA and IRB banks, especially for retail mortgages.

Improved competitive position of UK v international peers during transitional period.

Implementation and timelines

Implementation date moved back to Jan 1, 2026; full phase-in by Jan 1, 2030.

Need to prepare for revised Basel 3.1 SA calculations for output floor.

Major model updates needed for IRB banks to comply with new PD/LGD/EAD input floors and restrictions. 

Significant reporting and disclosure changes, need to monitor final taxonomy.

Credit risk: internal ratings-based (IRB) approach

• Restrictions on use Prohibits IRB for low default portfolios, such as banks, financial institutions, and sovereigns.
• New Input floors
  • Probability of default (PD) floor at 0.05%.
  • Loss given default (LGD) floors 10% for unsecured retail exposures, 15% for residential real estate.
• Specialised lending New 50% risk weight for ‘substantially stronger’ project finance exposures.
• Implementation timeline Firms must comply by 2026.

Credit risk mitigation

• Funded and unfunded credit protection Updated guidance to improve the clarity and application of credit risk mitigation (CRM).
• Enhanced recognition New rules for recognising credit protection to reduce variability and improve alignment with Basel 3.1 standards.

Output floor

• Implementation An output floor limits the reductions in risk-weighted assets (RWAs) from using internal models.
• Thresholds Gradual phase-in from 2026 to 2029, beginning at 50% and reaching 72.5% by the end of the transition period.
• Interaction with Pillar 2 Adjustments to align with the output floor requirements to avoid double counting of capital requirements.

Pillar 2

• Adjustment for output floor Firms' Pillar 2 requirements are adjusted to reflect changes in RWAs due to the output floor.
• Rebasing requirements Rebasing of Pillar 2A requirements during the transitional period to prevent unintended increases in capital requirements.

Disclosures – Pillar 3

• Updates to disclosure requirements Reflects changes in credit risk, market risk, CVA, and other capital calculations.
• New templates Introduction of new templates to align with Basel 3.1 and provide clearer information on firms' risk profiles and capital requirements.

Market risk

• New reporting templates Introduction of new templates for the Advanced Standardised Approach (ASA) and Internal Model Approach (IMA).
• Frequency of reporting Quarterly reporting retained despite industry requests for reduced frequency.
• Enhanced clarity Amendments to templates and instructions to improve the accuracy of reporting.

Credit valuation adjustment

• Revised CVA Framework New methodologies include AA-CVA, BA-CVA, and SA-CVA approaches.
• Adjustments Clarifications provided on how legacy trades should be reported under new CVA requirements.
• Simplification Reduction of operational burdens by simplifying reporting instructions and aligning with Basel 3.1 standards.

What can you do now?

Basel 3.1 implementation will have a considerable impact on strategy. There’s a lot to think about. As the second set of the near-final rules are here, work should be underway.

Attention to detail is key – how do the detailed rule changes your firm’s strategy, at the portfolio and product level? And are the rule changes embedded into data flows and exposures?

With such a broad scope, successful implementation relies on finding synergies with other regulatory approaches, and the SDDT regime, to reduce duplication and embed lasting change.

The PRA has made its expectations on Basel 3.1 clear – firms shouldn’t expect a soft-landing approach to compliance on 1 January 2026.

To learn more about the Basel 3.1 reforms and the impact on your firm, contact our team: Kantilal Pithia, Ramesh Parmar, Charles Ebeniang, Imran Ahmad, Sonam Nawani, or Riad Fawzi.