UK Basel 3.1: Credit risk standardised approach – off-balance sheet items
On 30 November 2022, the Prudential Regulation Authority (PRA) published a Consultation Paper 16/22 (CP16/22) proposing the implementation of Basel 3.1 standards. The framework was originally proposed to be implemented on January 1, 2025. However, according to the news release dated September 27, 2023, the revised implementation date is July 1, 2025. A brief summary of the changes proposed to determine the exposure value of off-balance sheet items under the credit risk standardised approach is provided below.
Key changes to determine the exposure value of off-balance sheet items (Article 111), include:
Off-balance sheet items are categorised into:
issued off-balance sheet items where a firm has underwritten an obligation to a third-party and stands behind the risk; and
commitments to extend credit, purchase assets, or issue off-balance sheet items at a future date.
Conversion factor (CF) increased from 0% to 10% for unconditionally cancellable undrawn commitments.
Commitments, where drawdowns are certain, would attract a CF of 100%.
Self-liquidating documentary credits are further bifurcated into short-term (original maturity less than one year) and long-term facilities, which are subject to separate CFs of 20% & 50% respectively.
A summary of the proposed classifications and applicable CFs is given below:
Existing and proposed CFs:
Items in the ‘Existing’ column are re-arranged to make them aligned with the proposed rules for comparison purposes.
Colour coding and pointers are added to the table below to highlight the change in the risk category.
