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The Basel 3.1 standards introduced by the UK Prudential Regulation Authority (PRA), closely align with the principles set forth by the Basel Committee on Banking Supervision (BCBS) and are intended to ensure that UK banks are well-capitalised, adequately prepared for financial shocks, and able to withstand economic downturns.
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These reforms are expected to be fully implemented by 1 July, 2025, factoring in a six-month extension from the original deadline of 1 January, 2025. Further, as part of the reform process, the PRA proposed a simpler set of standards for smaller firms.
PS17/23 and the Road to Basel 3.1: What financial institutions need to know
The PRA released the first part of the near-final Policy Statement (PS17/23) in December 2023 addressing key aspects such as Credit Valuation Adjustment (CVA), Counterparty Credit Risk (CCR), and Market Risk. The second part of the near-final Policy Statement, scheduled for release in Q2 2024, will cover Credit Risk and the Output Floor, completing the regulatory response to the consultation process.
1. Market risk
2. Credit valuation adjustments and counterparty credit risk
3. Operational risk
4. Impact of Basel Pillar 1 changes on Pillar 2
The PRA recognises the need for adjustments in firms' Pillar 2 capital requirements alongside the implementation of Basel 3.1 standards. In response the PRA has outlined the following actions:
5. Currency redenomination
6. Transitional Capital Regime (TCR)
PS15/23 and impact for Small Domestic Deposit Takers (SDDTs)
Policy Statement PS15/23 outlines the Strong and Simple Framework for small non-systemic firms, now referred to as Small Domestic Deposit Takers (SDDTs). These firms have the option to adopt a more simplified reporting process instead of navigating the complexities of the Basel 3.1 reporting regime. The PRA has set out the criteria for SDDT qualification, emphasising that participation in this regime is voluntary. The initial phase of these regulations, focusing on non-capital and disclosure aspects, as outlined by the PRA came into effect on 1 January, 2024, with the subsequent phases scheduled for the second quarter of 2024. Additionally, the PRA remains committed to exploring further opportunities to simplify these policies in the future.
Basel III reforms, particularly Basel 3.1, herald significant changes in risk management and capital adequacy standards, tailored to the unique dynamics of the UK financial market. To meet the deadline of 1 July, 2025, firms will need to keep moving forward. By working with their reporting solutions partner, firms can navigate these reforms efficiently, ensuring compliance and bolstering financial resilience in the face of evolving regulatory landscapes.
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Yogesh Patil, Lead Technology Product Manager, Wolters Kluwer
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