UK Basel 3.1: Credit risk standardised approach – exposures in default
On 12 September 2024, the Prudential Regulation Authority (PRA) published the second part of its near-final rules on the implementation of Basel 3.1 standards through Policy Statement 9/24 (PS9/24) which offers feedback on the responses received on Consultation Paper 16/22 (CP16/22) published on 30 November 2022.
PS9/24 covers inter alia the near-final rules on credit risk, disclosures, and reporting as well as minor clarifications and corrections to the previous near-final rules published within PS17/23. The implementation date for Basel 3.1 standards has also been postponed to 1 January 2026.
A brief summary of the changes relating to ‘exposures in default’ under the credit risk standardised approach is provided below.
Key changes to exposures in default, include:
To assess the specific credit risk adjustments threshold (20%) the outstanding amount of the facility is to be considered, instead of the unsecured part of the exposure value used currently.
A preferential risk weight of 100% would be applied on residential real estate exposures where repayments do not materially depend on the cash flows generated by the property (currently, 100% risk weight is applied only on exposures fully and completely secured by mortgages on residential or commercial property).
A summary of the revised classifications and applicable risk weights is given below:
Existing and revised Risk Weights
How We Can Help
Banks may face a variety of challenges when preparing for Basel 3.1. At Katalysys, we have a deep understanding of prudential regulatory requirements both from the perspective of rules and practical implementation. Our team is already supporting a range of clients in this area, and includes:
Workshops or training to cover new requirements.
Gap and impact analyses.
Guidance on implementing industry best-practice in relation to the Basel 3.1 standards.
Documenting or updating assumptions and interpretations in regulatory reporting.
Preparation of regulatory reporting policies and procedure notes.
Validation of the system outputs and calculations.
Review of regulatory returns, including post-implementation of Basel 3.1 changes.
For more information, please contact:
Josh Nowak
Managing Director, Risk & Regulatory Consulting
T: +44 (0)7587 720 988
Manish Patidar
Director, Regulatory Consulting
T: +44 (0)7766 001 643