Posted on: October 18, 2024

Basel 3.1

The Prudential Regulation Authority (PRA) published the final policy statement (9-24) on Basel 3.1. The effective date has been deferred to 1st January 2026. The transition period has been reduced to four years. This statement covers credit risk, including the Output Floor and mitigation. Also covered are reporting and disclosures. The document is introducing some new requirements and amending certain proposals. Of note, are those listed below.

Output Floor

The Output Floor level transitional percentages of risk weighted exposures according to the standardised approach to credit risk, have been revised. The change takes account of the shorter transition time until 1st January 2030. The calculation of the floor has been updated since its proposal, to include the effect of provisions.

Currency Multiplier

For retail and residential real estate exposures to individuals, that have an unhedged currency mismatch, there is a multiplier of 1.5. To identify the presence of a mismatch, the country of the borrower’s employment, can be used.  That data item is an alternative to using the currency of the borrower’s main income.

Credit Risk Standardised Approach

Regulatory Commercial Real Estate Exposures

Rules are to be introduced for exposures to SMEs. More generally, relative to the proposals in consultation paper 16-22, the requirements for commercial real estate exposures have been simplified, particularly where materially dependent on cash flows generated by the property.

Materially Dependent

The PRA has defined material dependence for regulatory real estate exposures, residential and commercial. All residential will be considered as materially dependent, unless certain conditions are met. These conditions are that the residential exposure:

  • Is secured on the individual’s primary residence or
  • Represents that to a UK regulated social housing provider or cooperative or
  • Is part of the Three Property Limit that has not been exceeded.

For commercial, material dependence will apply unless the secured property is being predominantly used for the purpose of the business.

Regulatory Residential Real Estate

  • Unfinished self-build properties will be included in the ‘Regulatory Residential Real Estate’ classification, rather than in ‘Other Residential Real Estate’.
  • Exposures that are materially dependent have an additional LTV bucket. The ‘60% < LTV <=80%’ one has been split into two buckets ‘60% < LTV <=70%’ and ‘70% < LTV <=80%’.

Taxonomy

The Banking Taxonomy 3.7.0 is still in draft form (as at 9th October 2024), but it is expected to be finalised in Q4 of this year. Once the taxonomy becomes final, Whistlebrook will make the changes and additions to templates and validation rules in its regulatory product. Currently, Whistlebrook is working with some PLUS clients on the automation side and encourages others to contact us, should they wish to have some involvement.

Small Domestic Deposit Takers Regime (SDDT)

The PRA issued a consultation paper 7-24, with proposals on the capital requirements of SDDT. The effective date of the rules is 1st January 2027.

Capital requirements for SDDTs will be a simplification of those in Basel 3.1.

For credit risk, only the standardised approach will be permitted. Due diligence required by Basel 3.1 will not be necessary, but some monitoring is expected. Operational risk measurement will be the same as in Basel 3.1. Traded debt and equity positions in a firm’s trading book will have market risk measured under the credit risk standardised approach (CRSA). Market risk will not be applicable to foreign exchange and commodities.

Counterparty credit risk (CCR) will not apply for most derivatives. For other CCR transactions, the exposure amount will be calculated using CRSA.

SDDT firms will not be subject to Credit Value Adjustment.

The above summary is just at the proposal stage.

Pillar 2 capital will be affected by the SDDT proposals. As part of that, a single capital buffer will be introduced and replace the conservation, countercyclical and PRA types.

Replacement of Cash Ratio Deposits

A Bank of England levy replaced the need for certain firms to place Cash Ratio Deposits at the central bank. The Bank issued Statistical Notice 24-12 to request firms resubmit their PL form for Q2 2024. The resubmission should include an accrual (commencing from the start of Q2) of the levy. Going forward, the annual levy should be accrued from Q2 each year. Firms that are subject to this levy are advised by the Bank of England.

Leverage Ratio Framework

The PRA is to offer the opportunity for firms to obtain a Modification by Consent that would exclude them from the requirements of the leverage ratio framework. Modification will be available to entities that did not meet the criteria of the framework, before 10 September 2024, but expect to do so by 31 December 2025.

The Modification by Consent will cease at close of business 30 June 2026.

Criteria for the framework to be applicable:

  • Retail deposits exceeding £50bn or
  • Non-UK assets of £10bn or more

WIRES Releases

Release Content Approximate Timing
7.0 Changes for Basel 3.1, minor enhancements, and small fixes To be confirmed.

This regulatory update is Whistlebrook’s understanding of the position as at 9th October 2024.