Banks in the EU and UK are facing a wave of new regulatory requirements as Basel III and Basel 3.1 updates roll out.
The staggered implementation timelines and differing requirements across various Basel-inspired frameworks exacerbate regional disparities. Countries like Australia, Canada, Hong Kong, Singapore, and Switzerland are more advanced in their implementations and have adhered closely to the BCBS standards. In contrast, the European Union’s CRR3 legislation, aimed at implementing Basel III (commonly referred to as Basel IV in the EU), diverges from the BCBS guidelines, as does the UK PRA’s Basel 3.1 proposal.
The EU finalized its banking package in July 2024, with new rules taking effect in December 2024. Basel 3.1 is scheduled for implementation in January 2025, with full compliance expected by 2030 through a phased approach. These changes require financial institutions to upgrade their internal reporting systems to comply with enhanced risk and capital data disclosure standards.
In the UK, on 12 December 2023, the Prudential Regulation Authority (PRA) published Policy Statement 17/23, presenting near-final rules for implementing Basel 3.1, based on Consultation Paper 16/22 (CP16/22). This covers credit risk, the output floor, and reporting/disclosure requirements. The PRA has revised the proposed implementation date to 1 July 2025, following feedback and alignment with other jurisdictions. A transitional period will ensure full implementation by 1 January 2030, with the transitional period reduced to 4.5 years.
While aligned with Basel III principles, UK-specific provisions introduce additional layers of complexity, making dual compliance a significant operational challenge. Adding to this complexity is how banks respond to and manage emerging risks such as sustainability and ESG-related and Interest Rate Risk in the Banking Book (IRRBB).
Basel 3.1 represents the final components of the Basel III standards on liquidity and capital—developed by the Basel Committee on Banking Supervision—that have yet to be implemented in the UK. In the US, this phase is commonly referred to as the “Basel Endgame.”
The proposed measures include updates to the standardised approaches for calculating credit risk, market risk, credit valuation adjustment, and operational risk. A key feature of Basel 3.1 is the introduction of an output floor to limit variability in risk-weighted assets, enhancing the comparability of capital ratios across banks. It also enforces higher leverage ratio requirements for global systemically important banks.
While these foundational elements remain intact, the latest changes emphasize tailored capital requirements for specific sectors and extend the implementation timeline.
The PRA has announced a postponement of the implementation date for the Basel 3.1 standards, rescheduling it to the start of 2026. A transitional period of four years has been established to ensure full implementation by the beginning of 2030.
This delay has been welcomed by UK banks, as it provides the clear one-year timeline they had requested to adopt the final proposals.
The Basel 3.1 policy update has been published as “near final” and the regulator “does not intend to change the policy or make substantive alterations to the instruments before the making of the final policy material”, it said in its update.
Among the key changes introduced are:
- Adjustments to SME Risk Weighting: The PRA has removed the EU-specific SME support factor and adopted a lowered risk weight of 85% for SME exposures under both the standardised and internal ratings-based approaches.
- Revised Risk Weighting for Infrastructure Lending: The PRA has introduced a lower risk weight of 50% for “substantially stronger” project finance exposures under the internal ratings-based slotting approach. This adjustment benefits higher-quality infrastructure lending, offering a more favorable treatment than the previous EU support factor.
- Reduced Conversion Factor for Trade Finance: The PRA has lowered the conversion factor for trade finance from 50% to 20%, deeming the original 50% factor overly conservative and not commensurate with the actual risk. This reduction aims to better reflect the true risk of trade finance exposures.
The EU’s updated regulations will impact data collection, risk management, and reporting accuracy, requiring financial institutions to adjust their reporting frameworks by December 2024. Meanwhile, UK banks must align with Basel 3.1’s distinct provisions, those leaders operating internationally still face the challenge of juggling different timelines in different jurisdictions.
These updates demand swift action from compliance teams, reporting analysts, and change managers to adapt existing processes and ensure timely, accurate regulatory submissions. A robust, flexible reporting infrastructure is essential to manage these dual obligations effectively.
To navigate these complexities, BR-AG offers expert regulatory reporting solutions designed to streamline compliance with Basel standards in the EU and UK . BR-AG’s regulatory reporting software ensures banks can adapt quickly to evolving regulations, maintain accuracy, and meet deadlines without operational disruption.
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