UK Basel 3.1: Credit risk standardised approach – retail exposures
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 summary of the changes relating to ‘retail exposures’ under the credit risk standardised approach is provided below.
Key changes to retail exposure class, under the standardised approach, include:
More granular classification based on exposure type into ‘regulatory retail’ (transactor and non-transactor) and ‘other retail’ categories
New risk sensitivity factor (x 1.5) to be applied in the event of currency mismatch (i.e. if the currency of the exposure differs from the obligor’s source of income)
The threshold updated from EUR 1 million to GBP 0.88 million
Risk weight ranges from 45% to 150% based on exposure type
Note: Exposures secured by real estate properties are covered in a separate article. [Real estate exposures]
A summary of the revised classifications and underlying criteria is given below:
*Any facility where the outstanding balance is permitted to fluctuate based on its decisions to borrow and repay, up to an agreed limit and in accordance with the terms of the facility agreement.
Existing and revised Risk Weights:
1 If the exposure's currency differs from the obligor's income source and no natural or financial hedge exists between them, a 1.5 factor is applied to the risk weight. For exposures incurred before the implementation date (i.e., 1 January 2026), a bank may assess the currency mismatch by comparing the exposure's currency with either the obligor's domestic currency or the currency of the country where the obligor is employed, used as a proxy.
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