On 12 February 2021, the PRA published Consultation Paper 5/21: Implementation of Basel Standards (CP5/21).

In response to the 2008 global financial crisis, the Basel Committee on Banking Supervision agreed a series of reforms to the financial services regulatory framework intended to enhance the resilience of internationally active banks. These measures are known as the Basel III standards. Some of the Basel III standards were implemented into EU law and subsequently converted into UK law through the Capital Requirements Regulation (CRR) and related onshored EU level 2 regulations that were made under the CRR. However, some of the remaining Basel III standards were not implemented in the EU before the end of the transition period and remain to be implemented by the UK.

The Financial Services Bill proposes to give the PRA the power to make rules that restate elements of the CRR and the CRR level 2 regulations revoked by HM Treasury and also to make new rules in those areas to give effect to the outstanding Basel III standards and adapted versions of those standards where appropriate.

The proposals in CP5/21 therefore seek to address some of the remaining weaknesses in banks’ risk management systems and the regulatory framework through:

  • Implementing some of the remaining Basel III standards, including by implementing adapted versions of those standards.
  • Restating without material modification those aspects of the CRR which HM Treasury proposes to revoke and the PRA proposes to restate in the PRA Rulebook.

Specifically, the proposals in CP5/21 cover:

  • Specification of the level and scope of application of the requirements for UK firms. Among other things the PRA proposes to amend Supervisory Statement 15/13 ‘Groups’ to clarify that one instance in which it may use its powers to require sub-consolidation is where the risks posed to a firm by its third-country subsidiary or subsidiaries warrant it on a case-by-case basis.
  • Revision to the definition of capital, in particular for the treatment of Common Equity Tier 1 (CET1) deductions for software assets and certain collective investment undertakings (CIUs). The PRA proposes to require all intangible assets, including software assets classified as intangible assets under the International Financial Reporting Standard, to be fully deducted from CET1 capital.
  • Revised Basel standards for prudent valuation for market risk and amendments to market risk management requirements. The PRA proposes to revise the basis on which certain market risk requirements are not applied to firms with limited trading activities. This is intended to enhance the proportionality of the PRA’s approach.
  • Revised Basel standards for calculating risk-weighted exposures to CIUs under the standardised approach and a more prudent treatment of exposures to certain CIUs located and managed in third countries.
  • A new Basel standardised approach to counterparty credit risk (SA-CCR) and the revised Basel framework for exposures to central counterparties (CCPs).
  • Clarification of the treatment of operating leases under the basic indicator approach (BIA) for operational risk. The PRA proposes to amend the methodology used for calculating the relevant indicator under the BIA to make explicit the treatment of leasing assets.
  • Implementation of the Basel III standards’ revised large exposures framework.
  • Implementation of the Basel III standards concerning the liquidity coverage ratio (LCR). The LCR requirement is currently set out in Part Six of the CRR and Delegated Acts 2015/61 and 2018/1620. The PRA expects that the Financial Services Bill will remove these requirements and empower the PRA to address them in PRA rules. The PRA proposes to replicate the LCR requirements of the CRR and Delegated Acts.
  • Basel III standards for the net stable funding ratio (NSFR), which would help ensure stable funding structures over a longer-term horizon. The PRA proposes to introduce a simplified NSFR for small and non-complex institutions.
  • An update to supervisory reporting. The PRA proposes to update the UK version of COREP and FINREP, through a combination of new returns, and to make amendments to existing reporting requirements.
  • Revised Basel disclosure standards, which would help enhance the comparability, quality, and consistency of institutions’ regulatory disclosures. The PRA proposes to introduce new rules on disclosure that would reflect phases 1 and 2 of the Basel disclosure standards, as well as information relevant to its market transparency proposals. The PRA also proposes to incorporate all Pillar 3 requirements to create a single source of disclosure requirements for UK firms.
  • The currency in which requirements would be set. The PRA proposes to redenominate currency references from Euros (EUR) to Great British Pounds Sterling (GBP).
  • The interaction between the temporary transitional power and CRR rules.
  • Enhanced proportionality for smaller firms, including:
  • Revised counterparty credit risk requirements including a simpler, more conservative SA-CCR approach for certain smaller firms and amendments to the original exposures method.
  • A simpler, more conservative NSFR (the simplified NSFR, or sNSFR) that certain smaller firms could choose to use.
  • Updates to the simplified capital requirements calculation for credit valuation adjustment risk.
  • Increasing the scope of more proportionate market risk capital requirements and exemptions from new market risk reporting requirements.
  • Tailored disclosure requirements.

In CP5/21 the PRA does not propose any new rules on leverage to replace proposed HM Treasury deletions from the CRR. As referenced in the September 2020 Regulatory Initiatives Grid, the Financial Policy Committee and Prudential Regulation Committee have announced that  they will conduct a review of the UK leverage ratio framework. This review is now expected to be completed in summer 2021.

The deadline for comments on CP5/21 is 3 May 2021.