Credit Risk – Standardised Approach
The PRA has proposed several changes to the Standardised Approach for credit risk which could have a significant impact on the risk-weighted assets (RWAs) of UK CRR firms.
Basel 3.1 – Understand the regulation
IndustriesFinancial ServicesBanking & Capital MarketsPrudential supportUnderstanding Basel 3.1
Basel 3.1 – Understand the regulation
In this series of short articles, our Prudential Regulation Consulting team delves into the implications of Basel 3.1 changes on banks.
The primary objective of the revisions in the current framework is to improve the reliability of capital ratios. This is being done by the following:
• Adding a far greater granularity in risk weighting under the standardised approach (SA) to Credit Risk.
• Complete overhaul of the approach to operational risk with the introduction of a new standardised approach.
• Addressing limitations of internal models (IMs) for the Internal ratings based (IRB) approach to credit risk.
• The impact of the reforms on Pillar 2 remains unaddressed. The Prudential Regulation Authority (PRA) is undertaking a review of Pillar 2 which will be completed in 2024.
As part of this review, we will consider each of those areas in further detail, exploring the impact that the changes may have on firms’ capital requirements and how the PRA is diverging from the European Central Bank (ECB) and even the Basel standards themselves.
Get in touch
If you have any further questions regarding Basel 3.1, please contact us via the button below and a member of our team will be in touch.
Credit Risk - IRB
The Prudential Regulation Authority’s (PRA) internal ratings based (IRB) proposals largely align with the Basel standards and there is limited divergence between the PRA and the European Central Bank (ECB) on this topic.
Operational Risk
Under Basel 3.1, all existing Pillar 1 operational risk approaches (basic indicator approach, standardised and advanced measurement) are being replaced by a new standardised approach which aims to encompass a firm’s size, complexity and historic operational risk performance. the latter is dictated by the internal loss multiplier (ILM) calculation.
Market risk
Under Basel 3.1, the Prudential Regulation Authority has proposed to implement changes to how firms measure market risk. These include an amended version of the preexisting simplified standardised approach (SSA) and two new calculation methodologies – an advanced standardised approach (ASA), and a new internal model approach (IMA).
Pillar 2
The PRA has disclosed that they intend to review the Pillar 2 capital framework by 2024 at the latest. It is worth noting that these timelines are incredibly tight when aligned with the planned implementation of Basel 3.1 on 1 July 2025.
Removal of the SME support factor
The PRA intends to remove the CRR SME supporting factor under the Standardised and IRB approaches to credit risk. This discount factor was introduced to limit disruption to the flow of credit to SMEs when stricter requirements were introduced after the Global Financial Crisis, in 2008.
Disclosures and Regulatory reporting
Under Basel 3.1, firms are classified based on a range of criteria, such as retail deposits, total assets, derivatives, complexity, or processes.
Key contacts
Freddie Blake Associate Director – Financial Services Consulting
