The PRA Publishes CP16-22 on Basel 3.1 Standards

After the global financial crisis, the Basel Committee on Banking Supervision (BCBS) issued the Basel III reforms to its standards to strengthen the regulation and risk management of banks. Many of the Basel III standards focusing on increasing the quantity and quality of capital maintained by banks have been implemented over the last two years. 

Last week, the Prudential Regulation Authority (PRA) published Consultation Paper 16-22 on the Basel 3.1 standards – the parts of Basel III that remain to be implemented in the UK. This newest CP focuses mostly on the measurement of risk-weighted assets (RWAs), which are used as the denominator of capital ratios. 

The other main aspects covered are the improvement of risk measurement in internal models (IMs) and standardized approaches (SAs) and the comparability of risk measurement across firms.

With this consultation paper, the PRA set out rules in the following key areas:

  1. Credit Risk:
    1. Revised SA
    2. Revision to Internal Ratings Based (IRB) approach
    3. Revision to Credit Risk Mitigation (CRM) techniques
  2. Operational Risk:
    1. Replacement of existing approaches with a new SA and removal of use of IMs
  3. Market Risk:
    1. Revised approach
  4. Counterparty Credit Risk:
    1. Replacement of existing approaches with a new SA and removal of use of IMs
  5. Risk Weighted Assets (RWAs):
    1. Aggregate ‘output floor’ to ensure total RWAs for firms using IMs and subject to the floor cannot fall below 72.5% of RWAs derived under SAs, to be phased in over five years

The PRA stated that this consultation will close on Friday, March 31st, 2023 and invited responses on any aspect of the proposals set out in this consultation. Responders are also requested to provide any data or evidence that is pertinent to such proposals.

Evalueserve’s risk experts use automation and analytics to enhance existing processes and help firms manage risk more efficiently and effectively. We have the deep domain knowledge needed to help banks navigate major regulatory changes such as the implementation of these standards. Speak to an expert today to learn how we can support your team.

Amit Inamdar
Head of AI ML Innovations Labs Posts

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