Blog: The UK’s PRA Publishes Consultation On Basel 3.1 – Financial … – Mondaq

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The UK’s PRA Publishes Consultation On Basel 3.1

23 January 2023

Cadwalader, Wickersham & Taft LLP

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In CP16/22 (published on 30 November 2022), the UK’s
Prudential Regulation Authority (“PRA”) sets out plans
for implementing the Basel 3.1 standards for calculating
risk-weighted assets (“RWA”). Concerned that downward
movement in average risk weights (measured by the ratio of RWA to
assets) over the last 10 years is due to fairly pervasive
underestimation in internally-modelled risk, the PRA is proposing
to align with international standards and implement the final Basel
3 package of significant changes to the way firms calculate RWA.
The PRA’s aim is to mitigate the threats to confidence caused
by degrees of variability in calculation of risk weights and
resultant inconsistencies in capital ratios and difficulties in
comparing like-for-like.

Basel 3.1 standards include revised standard and internal
ratings-based approaches for credit risk, revisions to the use of
credit risk mitigation techniques, a revised approach to market
risk, the removal of the use of internal models for operational
risk capital requirements and for credit valuation adjustment and
their replacement with new standard and basic approaches, and the
introduction of an aggregate “output floor” to ensure
that total RWAs using internal models cannot fall below 72.5% of
RWAs derived under standard approaches. This means a more granular
set of standard approaches for assessing risk exposures and the
removal of some internal model approaches, as well a new modelling
approach for internal ratings-based assessments, alongside
improvements to the trading book/non-trading book boundary.

Implementation is due on 1 January 2025, with a transition
period of five years from that date for most provisions.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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