UK Prudential Regulation Authority Publishes Second Near-Final Policy Statement on Implementation of the Basel 3.1 Standards

The U.K. Prudential Regulation Authority has published its second near-final Policy Statement on the implementation of the Basel 3.1 standards. The PRA has decided to move the implementation date by a further six months to January 1, 2026 with a transitional period of 4 years to ensure full implementation by January 1, 2030.

The policy statement provides feedback to responses to the following sections of the PRA's Consultation Paper 16/22: Chapter 3 – credit risk – standardized approach; Chapter 4 – credit risk – internal ratings based approach; Chapter 5 - credit risk mitigation; Chapter 9 - output floor; Chapter 11 - disclosure (Pillar 3); and Chapter 12 - reporting. The statement also contains feedback to responses on the parts of Pillar 2 relating to the Pillar 2A credit risk methodology, use of IRB approach benchmarks, and the interaction with the output floor.

Respondents were generally supportive of the overall approach set out by the PRA, however they raised concerns about a range of issues. The PRA has made material changes to its proposals as consulted on, including: (i) amendments to the treatment of small and medium-sized entity lending to reduce the operational burden for firms and lower capital requirements; (ii) amendments to the treatment of infrastructure lending to lower capital requirements; (iii) lower, more risk-sensitive conversion factors for off-balance sheet items to better reflect empirical data provided by respondents; (iv) a more risk-sensitive and operationally simpler approach to the valuation of residential real estate under the credit risk standardized approach; and (v) an approach to calculating the output floor which enhances consistency between standardized approach approaches and the output floor. The PRA has made some minor clarifications and corrections to the near-final rules published within the first near-final policy statement, PS 17/23. These have been incorporated into the comprehensive near-final PRA rulebook instrument, covering all of the Basel 3.1 standards.

Once HM Treasury has made the commencement regulations to revoke the relevant parts of U.K. Capital Requirements Regulation, the PRA will publish all final policy materials, rules and technical standards in a single, final policy statement.

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