Implementing Basel 3.1 in the UK – speech by Phil Evans
In his speech Implementing Basel 3.1 in the UK Phil Evans, Director of Prudential Policy, provided an overview of the approach that the PRA is adopting with regards the implementation of the final tranche of Basel requirements which involve significant changes to the way in which risk weighted assets (RWAs)are calculated in capital ratios. Full details of these proposals are included in CP/22 – Implementation of the Basel 3.1 standards published on 30 November 2022 ( see previous blog entry).
The key points he made include:
The changes, here referred to as Basel 3.1 though this term is not one used by the BCBS, are aimed at improving the measurement of risk in internal models and standardised approaches in order to reduce excessive variability in the calculation of RWAs and improve the accuracy of capital ratios;
The package of proposals is the first to be developed post-Brexit but the intention is to continue to require banks to meet high standards, whilst accepting that some tweaks are required to address UK specific issues, such as less onerous requirements for smaller banks;
Proposals are currently out for consultation with responses requested by end March 2023. Final PRA requirements are expected to be published later in 2023 with implementation due by 1 January 2025, except for the output floor which will be phased in by 1 January 2030;
Once fully implemented the impact of capital requirements is expected to be fairly modest, around a 6% increase overall, though it is hard to estimate some impacts at this stage.
One point to note is that when originally published in December 2017 the “final changes” to Basel requirements were due to be implemented by 1 January 2022, and the introduction of the output floor completed by 1 January 2027, though these dates were subsequently extended by a year due to Covid-19. Following this announcement it is confirmed that, in line with what had already been announced for the EU, these dates have now been pushed out by 2 years. As yet the US has not published its stance.