Key observations on Bank of England’s Basel 3.1 Policy Statement (PS9/24)

The latest Basel 3.1 update highlights notable concessions to the industry from the Bank of England. This reflects an ongoing international trend by transatlantic regulators over the past six months. It also reflects the increased focus of the regulatory authorities in the UK on international competitiveness, which was made a secondary objective of the PRA last year.

• In the UK, the revised proposals will reduce the capital impact of Basel 3.1. According to the PRA’s own analysis, the increase in capital requirements for banks has fallen from 3.2% under the original consultation, to just 1% in the new proposals.    
• The Basel 3.1 standards will come into force on 1 January 2026 with full implementation by 1 January 2030. This is a further 6-month delay to the Basel 3.1 implementation date.
• The Bank of England has made substantial changes to its SME proposals. While removal of the SME support factor will still take place, they are introducing a firm-specific adjustment so that removal of the SME support factor does not result in an increase in overall capital requirements. A similar approach has been adopted for the treatment of infrastructure lending which also previously benefited from a support factor under the old regime.
• As a result, any forecast uplift in capital requirements for lending to SMEs has been neutralised. The original Bank of England proposals were calculated by Forvis Mazars to result in a 3.5% increase in Risk Weighted Assets for the most affected firms.
• The proposals relating to care homes, purpose-built student accommodation and holiday lets represent a compromise from the Bank of England. In a major revision from the original proposals, these categories of lending will not be entirely excluded from the residential property category. However, the litmus test of whether these types of properties will receive lower risk weights is if they can be resold as standard residential dwellings.
• Significant amendments have been made to how firms are permitted to carry out valuation of real estate collateral. While the valuation of collateral will still take place at origination, a revaluation backstop has been put in place. This will mean firms will have to acquire an updated valuation every 5 years, with exceptions for larger exposures.
• The thresholds for IRB models approval have been relaxed. The Bank of England confirmed that it will lower the threshold for approval from ‘full compliance’ to ‘material compliance’. However, the regulator explicitly refused to give further detail on how they would assess ‘material compliance’.
• Regulatory reporting requirements have been streamlined to reflect changes in the revised proposals, and better align with Pillar 3 disclosures. Firms will still be required to state their historical losses and Internal Loss Multiplier (ILM) as part of operational risk reporting.

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