Bank of England Publishes Policy Statement on Implementation of Basel 3.1 Standards01/03/2024The Bank of England has published a Policy Statement on the Implementation of the Basel 3.1 standards in the U.K., taking account of responses to its Consultation Paper 16/22 published in November 2022. The Basel 3.1 changes introduce the as yet unimplemented Basel reforms to banks' regulatory capital frameworks, intended to restore credibility in the calculation of risk-weighted assets and improve the comparability of banks' capital ratios.
The Policy Statement includes near final rules on the following aspects of Basel 3.1:
- Scope and application of the Basel 3.1 standards, which will broadly replicate the scope of the Capital Requirements Regulation with certain exceptions. Small Domestic Deposit Taker institutions will not have to apply the Basel 3.1 standards and will instead fall within a Transitional Capital Regime (based on existing CRR rules) until the permanent strong and simple framework is introduced for SDDTs.
- New requirements for market risk to establish which positions should be allocated to the trading book and revised methodologies for calculating market risk.
- New methodologies for calculating credit valuation adjustment risk—the alternative approach, the basic approach and the standardized approach—and adjustments to the standardized approach for counterparty credit risk.
- A new standardized approach for Pillar 1 operational risk capital requirements.
- Redenomination of certain Basel 3.1 references to US dollars and euros into pounds sterling.
The BoE plans to publish a further Policy Statement with near final rules on the remaining aspects of Basel 3.1 in Q2 2024, namely:
- Revisions to the standardized and internal ratings based approaches to calculating credit risk.
- Amendments to the credit risk mitigation framework.
- Implementation of the output floor.
- Modification of Pillar 3 disclosure templates and reporting requirements.
The final rules will be published once HM Treasury has revoked the relevant parts of the CRR. The rules will take effect from July 1, 2025, with a 4.5-year transitional period requiring firms to fully implement the standards by January 1, 2030. The EU proposes to implement Basel 3.1 from January 1, 2025, while the US anticipates an implementation date of July 1, 2025.
The PRA estimates that the U.K.'s proposals for Basel 3.1 implementation will require a 3.2% increase in U.K. firms' Tier 1 capital requirements once the regime is fully in force. This compares favorably to both the US and EU implementation, where requirements will increase more substantially (by 9.9% for Tier 1 requirements in the EU and, for Common Equity Tier 1, up to 16% in the US).
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