On 30 November 2022, there was published:

• HM Treasury consultation ‘Implementation of the Basel 3.1 standards’.
• PRA Consultation Paper 16/22 ‘Implementation of the Basel 3.1 standards’

HM Treasury consultation

HM Treasury is consulting on the legislative changes necessary to facilitate the PRA’s implementation of the final set of Basel reforms, introduced following the financial crisis, known as Basel 3.1. The consultation closes on 30 January 2023.

In chapter 2 of the consultation the PRA outlines proposed revocations to the onshored Capital Requirements Regulation (CRR). The revocations are targeted at the areas required to implement Basel 3.1 and to provide as coherent a transition into the PRA Rulebook as possible.

Chapter 3 of the consultation deals with consequential amendments to the CRR. Such consequential amendments include changes to exemptions from holding capital requirements against Credit Valuation Adjustment (CVA) risk, and how these exemptions link to the European Market Infrastructure Regulation. Other proposed amendments include updating definitions and the removal of CRR article 142(2), which contains an equivalence provision that would apply to large financial sector entities.

In chapter 4, whilst not currently seeking to amend or revoke these rules, HM Treasury is interested in hearing views as to the operation of the equivalence regimes set out in Articles 107, 114, 115, 116, 142 and 391 CRR.

Chapters 5 and 6 deal with credit rating coverage in the UK and other miscellaneous changes respectively. One such miscellaneous changes relates to the prudential treatment of overseas exchanges and the process by which they are “recognised exchanges” under the CRR.

PRA consultation

In its consultation the PRA sets out proposed rules with respect to the implementation of the Basel 3.1 standards. These proposed rules consist of:

• A revised standardised approach for credit risk.
• Revisions to the internal ratings based (IRB) approach for credit risk.
• Revisions to the use of credit risk mitigation (CRM) techniques.
• Removal of the use of internal models for calculating operational risk capital requirements, and a new standardised approach to replace existing approaches.
• A revised approach to market risk.
• The removal of the use of internal models for CVA risk, replaced by new standardised and basic approaches.
• The introduction of an aggregate ‘output floor’ to ensure total risk-weighted assets (RWAs) for firms using internal models and subject to the floor cannot fall below 72.5% of RWAs derived under standardised approaches, to be phased in over five years.

The PRA’s proposals also revise certain areas of the Basel III standards already implemented in the UK and would have consequential impacts on the UK implementation of the leverage ratio, and elements of the liquidity and large exposures frameworks. These consequential impacts are described in paragraphs 1.57 to 1.59 of the consultation paper.

The deadline for comments on the consultation paper is 31 March 2023.