On 12 December 2023, the Prudential Regulation Authority (PRA) published the first of two near-final policy statements covering the implementation of the Basel 3.1 standards for market risk, credit valuation adjustment risk, counterparty credit risk and operational risk.

The policy statement, PS17/23, takes account of feedback the PRA received to its consultation paper CP16/22 on the Basel 3.1 standards. As a result of the feedback received during and after the consultation period, the PRA has adjusted its original proposals in a range of areas including to:

  • Amend the proposals where respondents provided evidence suggesting they did not appropriately and/or proportionately reflect risks.
  • Facilitate policy implementation where feedback suggested prudent but less burdensome alternative approaches were available.
  • Enhance the relative standing of the UK as a place for internationally active firms to operate.
  • Improve the clarity of rules.

The PRA highlights that the most material of these adjustments include the removal of market risk internal modelling for the default risk of exposures to sovereigns, aligning the market risk and credit risk frameworks and addressing capital requirements for some sovereigns put forward under the original proposals; and added flexibility in the credit valuation adjustment risk framework through the introduction of an additional, optional, transitional arrangement to reduce operational burden on firms.

Near-final PS17/23 also reaffirms the PRA’s intention to avoid any potential double-counting of capital requirements with existing firm-specific Pillar 2 requirements, and describes how the PRA will approach it in practice by prioritising adjusting firm-specific Pillar 2 capital ahead of implementation in July 2025.

The PRA has not made final rule instruments at this stage as HM Treasury will first need to revoke the relevant parts of the Capital Requirements Regulation by way of statutory instrument (SI), before the PRA can replace them in the PRA rules. Once the SI has been made, the PRA intends to make all the final policy materials, rules, and technical standards in a single, final policy statement.

Next steps

The PRA does not intend to change the policy set out in near-final form in PS17/23, or to make substantive alterations to the instruments, before the making of the final policy material. This will also be the case of the policy material in the second near-final policy statement, which the PRA plans to publish in Q2 2024, covering the remaining chapters of CP16/22 not addressed in PS17/23 (including credit risk, the output floor, reporting and disclosure requirements).

The timeline for Basel 3.1 standards implementation is on 1 July 2025 with a 4.5-year transitional period ending on 1 January 2030.