Treasury and BoE consult on Basel 3.1 implementation

Both HM Treasury and the BoE/PRA have published consultation papers on the implementation of the Basel 3.1 standards.

These are expected to be the final elements of the Basel reforms to be implemented following the 2008 financial crisis. Broadly, the standards dictate the amount of capital banks need to hold against the risks they take and are agreed at international level by the Basel Committee on Banking Supervision.

HM Treasury’s consultation will revoke relevant parts of the CRR that were onshored post Brexit, so as to allow PRA rules implementing the relevant parts of Basel 3.1 to have effect instead. It is the same power used in 2021 when PRA implemented outstanding Basel 3 standards.

The BoE/PRA consultation focuses on the measurement of RWAs and in particular:

  • a revised standardised approach for credit risk;
  • revisions to the IRB approach for credit risk;
  • revisions to the use of 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 internal models for credit valuation adjustment risk, again to be replaced by new standardised and basic approaches;
  • a new aggregate “output floor” to ensure total RWAs for firms that use internal models can’t fall below 72.5% of those using the standardised approach; and
  • making consequential changes affecting the leverage ratio and elements of the liquidity and large exposures frameworks.

The HM Treasury consultation closes on 31 January 2023 and the BoE/PRA consultation closes on 31 March 2023.

Duncan Scott