The primary objective of the revisions in the current framework is to improve the reliability of capital ratios. This is being done by the following:
• Adding a far greater granularity in risk weighting under the standardised approach (SA) to Credit Risk.
• Complete overhaul of the approach to operational risk with the introduction of a new standardised approach.
• Addressing limitations of internal models (IMs) for the Internal ratings based (IRB) approach to credit risk.
• The impact of the reforms on Pillar 2 remains unaddressed. The Prudential Regulation Authority (PRA) is undertaking a review of Pillar 2 which will be completed in 2024.
As part of this review, we will consider each of those areas in further detail, exploring the impact that the changes may have on firms’ capital requirements and how the PRA is diverging from the European Central Bank (ECB) and even the Basel standards themselves.
If you have any further questions regarding Basel 3.1, please contact us via the button below and a member of our team will be in touch.
The new Credit Value Adjustment (CVA) risk framework methodologies for calculating capital requirements will comprise of the Alternative Approach, the Basis Approach and the Standardised Approach.
One of the centrepieces of the revised Basel proposals is the updated Output Floor. The main aim of the Output Floor is to bring greater alignment between the capital requirements for the credit risk Standardised and Internal Models approaches.
As part of its near-final rules (PS9/24) the PRA has proposed several changes to the Standardised Approach for credit risk which could have a significant impact on the RWAs for UK banks and building societies.
The PRA’s IRB proposals focus on reducing the complexity of the approaches and improving comparability across firms.
Under Basel 3.1, all existing Pillar 1 operational risk approaches (basic indicator approach, standardised and advanced measurement) are being replaced by a new standardised approach which aims to encompass a firm’s size, complexity and historic operational risk performance. the latter is dictated by the internal loss multiplier (ILM) calculation.
Under Basel 3.1, the Prudential Regulation Authority has proposed to implement changes to how firms measure market risk. These include an amended version of the preexisting simplified standardised approach (SSA) and two new calculation methodologies – an advanced standardised approach (ASA), and a new internal model approach (IMA).
The PRA has disclosed that they intend to review the Pillar 2 capital framework by 2024 at the latest. It is worth noting that these timelines are incredibly tight when aligned with the planned implementation of Basel 3.1 on 1 July 2025.
The PRA has confirmed the removal of the CRR SME Supporting factor under the Standardised and IRB approaches their near final rules for Credit Risk. However, an ‘SME Lending Adjustment’ will be introduced to offset the impact on the cost of SME lending. This is with the intention of ensuring that the cost of capital for SME exposures will be net neutral under the Basel 3.1 regime.
Under Basel 3.1, firms are classified based on a range of criteria, such as retail deposits, total assets, derivatives, complexity, or processes.
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