Basel 3.1 Final Rules – What to look out for

There may be changes between Consultation and Policy

Firstly, a word of warning! There remains a possibility that there could be substantial changes to the Consultation Paper (CP16/22) for both Credit Risk in particular. This observation is given credence by the fact that the Bank of England have recently been making increasing noise about ensuring the ‘international competitiveness’ of the UK’s approach. This contrasts with the language used by the regulator around the time of CP16/22’s release, where greater focus was on ensuring material compliance with the underlying Basel proposals. Could the regulator be reconsidering some of the more contentious aspects of the consultation like the removal SME Discount Factor? Watch this space!

IRB Models application may be getting easier

The mood music for Internals Ratings Based (IRB) models has largely been negative throughout the Basel consultation process. The aim of the PRA’s credit risk proposals is to enhance risk sensitivity and robustness in the standardised approach (SA), while neutering the benefits of IRB models and restricting their use.

However, the new threshold for receiving approval to use IRB models has been relaxed which should be good news for Challenge Banks in particular. Many have been struggling to receive IRB models approval for up to a decade now.

This threshold is expected to change from ‘full compliance’ to ‘material compliance’ which may foreshadow a relaxation in the requirements associated with IRB model approval. However, in CP 16/22 there wasn’t much detail on what ‘material compliance’ would entail. Therefore, this section of the near-final rules should attract particular focus when policy is published.

International firms should pay particular attention to the Output Floor rules

Under the current proposals, UK subsidiaries of third-country firms will not be subject to the output floor in the UK. This is to avoid ‘double counting’, with the expectation being that the output floor will be applied at the level of the Parent, in their home jurisdiction.

This means that subsidiaries of third-country firms with internal models may have an advantage against their domestic counterparties if their HQ is in jurisdictions with divergent approaches on the Output Floor. In order to ensure international firms continue to materially align with domestic banks, the PRA have made high level statements but there has been no concrete information produced by the regulator. Expect further clarity on this when the near final rules are produced.nts but there has been no concrete information produced by the regulator. Expect further clarity on this when the near final rules are produced.

We are running a webinar series to discuss all things Basel 3.1. The next sessions will take place following the publication of the near-final Credit Risk and Output Floor rules. Register your place

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