The UK Prudential Regulation Authority (PRA) recently moved forward, by six months, the implementation date for final Basel rules in the country to January 01, 2026 while the transitional period will still end on December 31, 2029. Also published were the second near-final policy statement on implementing the Basel 3.1 standards and the proposals for the “Strong and Simple" capital regime for small domestic deposit takers. The consultation for the Small and Simple capital regime ends on December 12, 2024 while PRA proposed the implementation date for this regime to be January 01, 2027. Additionally, His Majesty’s Treasury (HMT) published three pieces of draft legislation alongside a policy update to facilitate changes to prudential framework for banks.
PRA had published, in December 2023, the first near-final policy statement on the implementation of the final Basel standards for market risk, credit valuation adjustment risk, counterparty credit risk, and operational risk. This is now followed by the recently published second near-final policy statement and rules, which cover the implementation of Basel 3.1 standards for credit risk, output floor, reporting, and disclosure requirements. In the second near-final policy documents, key changes with respect to the original proposals include:
lower capital requirements for small and medium enterprise (SME) exposures, resulting in no increase in capital requirements relative to today
improvements to reduce operational burdens, making it easier for firms to lend to SMEs
lower capital requirements for infrastructure exposures and for trade finance-related activities
simpler, more risk-sensitive approach to valuing residential property
adjusted approach to calculating the output floor, which improves the consistency between this and the standardized approaches used by firms without model approval
However, the set of rules in these two near-final policy statements do not apply to smaller banks, specifically Small Domestic Deposit Takers (SDDTs). For these smaller banks, PRA has proposed less stringent capital requirements, with simplifications across all elements of the capital stack, including Pillar 1 risk-weighted assets, Pillar 2, and capital buffers (using Basel 3.1 rules with certain simplifications). Among others, in the proposed capital regime for smaller banks (SDDTs), PRA proposes to
revoke the Interim Capital Regime (ICR), requiring firms that opted into the ICR to implement either the full Basel 3.1 standards or the capital regime the simpler capital regime (recently proposed for SDDTs)
simplify the Pillar 1 framework through the disapplication of the due diligence requirements in the standardized approach to credit risk (CR SA), simplifications to the market risk framework, the disapplication of capital requirements for counterparty credit risk for derivatives (with some minor exceptions) and credit valuation adjustment (CVA) risk, and consequential changes to the Leverage Ratio and Large Exposures rules
simplify the Pillar 2A methodologies for credit risk, credit concentration risk, and operational risk; the Internal Capital Adequacy Assessment process (ICAAP); certain complex capital deduction rules; and reporting requirements
introduce a new Single Capital Buffer (SCB) framework to replace the current buffers framework (consisting of the Capital Conservation Buffer and Countercyclical Capital Buffer, which together make up the combined buffer, and the PRA buffer), and removes the automatic capital conservation measures under the maximum distributable amount (MDA) framework
replace the current cyclical stress testing framework with a non-cyclical framework
reduce the frequency of the Internal Liquidity Adequacy Assessment Process review (ILAAP)
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