PRA publishes second near-final policy statement on Basel 3.1 reforms

On 12 September 2024, the Bank of England’s Prudential Regulation Authority (PRA) published its second near-final policy statement (PS9/24 – Implementation of the Basel 3.1 standards near-final part 2 (see here) (PS9/24)) on implementing the Basel 3.1 standards for credit risk, the output floor, reporting and disclosure requirements. The first near-final policy statement was published on 12 December 2023 (PS17/23: see here).

By way of background, the Basel 3 reforms were put in place after the financial crisis of 2007-8 to establish minimum capital requirements in order to help banks withstand the losses incurred during turbulent or difficult times. The implementation of the final phase of the Basel 3 reforms (known as Basel 3.1 in the UK) was about capturing risk more accurately (via the introduction of more stringent capital requirements), aimed at enabling firms to hold an appropriate amount of capital against that risk, ultimately strengthening the stability of the financial system. 

Following the consultation and taking into account feedback from stakeholders on PS9/24 (which affects all PRA-regulated banks, building societies, investment firms and financial holding companies), the PRA said it would be making substantial amendments to earlier proposed Basel 3.1 reforms. These had been flagged as being quite conservative and associated with excessive costs or challenges in order to implement them. The PRA, in its news release published on 12 September 2024, has stated that it will “support financial and economic stability, and the growth and competitiveness of the UK, while remaining aligned to international standards”, and that it has had “particular regard to growth and competitiveness considerations given that the PRA’s new secondary growth and competitiveness objective has now come into force.” The PRA estimates that the Tier 1 capital requirements across major banks will see an aggregate increase of less than 1 per cent by January 2030 (phased in over four years – a smaller figure than for the PRA’s original consultation proposals).

Key changes

These include:

• Lower capital requirements for small and medium enterprises (SMEs), infrastructure and trade finance-related activities,
• A simpler, more risk-sensitive approach to valuing residential property, and
• Adjustments to the output floor calculation for consistency.
  
  

Timing/Implementation

In order to ensure and support a smooth implementation of the Basel 3.1 standards, the PRA has moved the implementation date by a further six months to 1 January 2026 (it was previously 1 July 2025) with a four-year transitional period which ends on 31 December 2029.

Also on 12 September 2024, the PRA introduced the "Strong and Simple" capital regime for Small Domestic Deposit Takers which aims to simplify their capital requirements while maintaining resilience. The consultation period for this regime closes on 12 December 2024, and a copy of the consultation paper (CP7/24) can be found here. The PRA has proposed that the implementation date for the "Strong and Simple" capital regime will be 1 January 2027.

Comment

The PRA has taken into account the considerable feedback given during the previous consultation process, which has resulted in the Basel 3.1 reforms being slightly less stringent than initially proposed. The later timeframe for implementation also allows financial institutions more time to prepare themselves and hopefully smooth the transition from the current standards. As the PRA said when introducing the changes in the speech by Phil Evans (see here) on 12 September 2024: “We have aimed for risk weights that are neither too high nor too low, and in doing so provide a balance across a range of considerations. This includes advancing our primary objective and aligning with international standards. And it includes a significant role for considerations around competitiveness and growth and competition. Taking all of these factors as a whole, it has produced, in our view, a balanced approach to finishing Basel 3.1 in the UK.”

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2024