PRA consults on Basel 3.1 market risk model changes in UK

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Basel 3.1 market risk changes

Highlights

The PRA proposes extending the profit and loss attribution test monitoring period from one to three years, enhancing data collection before capital calculations under Basel 3.1.
Targeted adjustments aim to ease IMA approval by reducing transition-related capital increases, introducing risk-sensitive frameworks, and providing operational simplifications for firms.
The PRA will implement IMA adjustments on 1 January 2028, while all other Basel 3.1 rules start January 2027 and sector benchmark capital requirements drop from 14% to 13%.

Consultation outlines targeted rule adjustments

As reported by the Bank of England, the PRA is consulting on changes to the internal model approach, or IMA, used by banks to calculate capital needed against potential trading losses under Basel 3.1.

The framework sits within the market risk rules known as the Fundamental Review of the Trading Book. Banks can either use a standardised approach, which is simpler but often carries higher capital requirements, or seek approval to use internal models, an option typically used by larger firms with extensive trading operations, including international banks.

The proposed adjustments include extending the monitoring period for the profit and loss attribution test from one year to three years, giving the PRA more time to collect data and confirm the right calibration before the test is used for capital calculations. The consultation also proposes a more targeted treatment for activity with limited trading data, allowing more risks to be modelled where appropriate and making the capital framework more risk-sensitive.

Other changes are designed to reduce obstacles for firms moving gradually to full IMA approval. The PRA says it wants to avoid a situation in which capital requirements increase as banks transition from a mixed use of internal models and standardised approaches, while also introducing operational simplifications to make the regime more proportionate.

Implementation timetable and wider banking impact

The PRA says it delayed implementation of its IMA rules so it could consider how other major trading jurisdictions are applying similar standards, reflecting the international nature of banks' trading activities and the regulator's competitiveness and growth objective.

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, says the rules are the last part of the post-financial-crisis reform programme agreed between the UK and other major jurisdictions. He says the added time allows the regulator to reflect implementation elsewhere while ensuring trading activity in the UK remains appropriately capitalised.

The authority intends to implement the IMA adjustments on its previously announced date of 1 January 2028. It is not proposing other changes to Basel 3.1, and all other rules are still due to take effect in January 2027.

The consultation also fits into a broader package of UK banking reforms intended to support economic growth while preserving financial stability. The PRA points to the Financial Policy Committee's recent capital review, which cuts the benchmark for capital requirements in the financial sector from 14% to 13%, along with simplified requirements for smaller lenders and higher thresholds for MREL and resolvability reporting focused on the largest and most complex firms.

In our earlier coverage of proposed European Union banking reforms, we outlined plans to give lenders more flexibility to move capital and liquidity across member states by allowing groups to manage resources more at the parent-company level. We also noted that the draft package would simplify parts of the regulatory framework, potentially easing some Basel III-related burdens for mortgage and corporate lending while reopening debate on deposit insurance and crisis-management responsibilities.

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