Basel 3.1

The implementation of Basel 3.1 is one of the biggest priorities for banks operating in the UK as they move into 2024. For many, the PRA’s recent announcement pushing the go-live date back to 1 July 2025 may have prompted a positive response that there is now a further six months to prepare. The delay offers banks a window of opportunity to recalibrate their compliance approaches and strategies, refine their systems and ensure that they are fully equipped to navigate the complexities of the Basel 3.1 landscape. However, given the extent of change required, banks cannot afford to ease off on their preparations.

The changes to Basel rules create significant work for banks. However, this should be considered as an opportunity not only to ensure regulatory compliance but also to consider the capital impacts and how their business should evolve to deliver future profitability.

KPMG in the UK has the skills and expertise to support you through all the stages of this transformative journey. Read on for a summary of our views on the challenges banks will likely face as they look towards implementation and to learn more about potential strategies for successfully navigating the complex Basel 3.1 requirements.

The PRA published its proposals for the implementation of Basel 3.1 in November 2022 (CP16/22). On 27 September 2023, the PRA delayed the UK implementation start date from from 1 January to 1 July 2025, and shortened the phase-in period for the output floor to 4.5 years. The revised UK start date is in line with current US proposals — the EU is continuing to work towards a start date of 1 January 2025.

Near-final UK rules are expected in two tranches: in Q4 2023 for market risk, credit valuation adjustment (CVA) risk, counterparty credit risk and operational risk, and in Q2 2024 for credit risk, the output floor and disclosures.

Firms have significant work to do to ensure timely compliance with the Basel 3.1 requirements. This includes, but is not limited to:

• Standing up and executing a strategic implementation programme
• Performing gap analysis assessments against the new rules
• Data sourcing for new attributes required for real estate, unrated corporates and institutions
• Reviewing and updating existing policy interpretations
• Identifying and making necessary changes to operating models
• Building and implementing RWA calculators for the new standardised approaches for credit, market and operational risk
• Building the standardised floor calculation for Internal Ratings Based (IRB) banks
• Submitting model applications or re-applications to continue using the IRB approach for credit risk at least six months before the implementation period
• Re-visiting impacts with front office and educating board and executive management

The PRA's consultation has raised concerns across the banking industry, not least:

• The “very clear feedback from firms” on areas which are too punitive, for example the lending to unrated corporates, SMEs, trade finance and accounting provisions
• The importance of maintaining a level playing field across jurisdictions to prevent regulatory fragmentation — to prevent unintended consequences and market distortions

Banks in the UK have been tracking the strategic impact on capital ratios since the Basel Committee first published its final reforms, through exercises such as the quantative impact studies (QIS), and have established implementation programmes for components such as SA-CCR and FRTB. However, most large banks only set up holistic Basel 3.1 programmes in Q4 2022 and many smaller firms have not yet commenced the necessary impact analysis.

Whilst the PRA's final Basel 3.1. rules have not yet been published, enough is known for firms to make meaningful progress on a “no-regrets basis”. Given the volume of change required, firms must act now to ensure there is sufficient time for a complete and compliant implementation.

Several of the proposed changes will have significant impacts, affecting not only the amount of capital banks are required to hold, but also the type of business that they are able and wish to engage in going forward. 

Basel 3.1 is not only about interpreting and applying regulations — it is about getting ahead of the ways in which the new requirements could impact your business and ensuring future profitability. KPMG in the UK is already supporting many clients on their Basel 3.1 journey and can share learnings and insights from this work.