PRA delays and dilutes new capital regime for banks

UPDATED: The Prudential Regulation Authority (PRA) has back-pedalled on plans to introduce tougher capital rules for UK banks, and shifted the implementation date for the Basel 3.1 standards by a further six months to 1st January 2026 with a four-year transitional period ending on 31st December 2029.

The regulator now says its estimates based on latest data from firms suggest that the Tier 1 capital requirements for major UK firms will be virtually unchanged, with an aggregate increase of less than 1% from January 2030 when the transitional arrangements come to an end.  This compares with its earlier estimate of a 3% rise in banks’ key capital thresholds.

The watchdog has published its second near-final policy statement and rules covering the implementation of Basel 3.1 standards for credit risk, the output floor, reporting and disclosure requirements. These are relevant to all PRA-regulated banks, building societies, investment firms and financial holding companies.

The PRA says some of the most material changes to the original proposals include:

• Lower capital requirements for small and medium enterprise (SME) exposures: resulting in no increase in capital requirements relative to today, and improvements to reduce operational burdens, making it easier for firms to lend to SMEs;
• Lower capital requirements for infrastructure exposures: resulting in no increase in capital requirements relative to today;
• Lower capital requirements for trade finance-related activities: maintaining the existing UK capital requirements regulation (CRR) 20% conversion factor for ‘transaction-related contingent items’;
• A simpler, more risk-sensitive approach to valuing residential property;
• An adjusted approach to calculating the output floor: which improves the consistency between this, and the standardised approaches used by firms without model approval.

“These rules will improve the way in which we regulate the banks in order to maintain safety and soundness and wider financial stability. We have made a number of important changes following consultation, and the resulting package will support growth and competitiveness while also ensuring that the UK aligns with international standards.”

“While on the face of it this looks to be a sensible approach that identifies more proportionate capital requirements to address risk, we want to examine the detail to ensure that it works adequately for our membership.

“The Chancellor recognises that economic growth requires lenders who are ready and able to lend, and the rules will go some way to ensure this remains the case.”

Strong and simple

The PRA also indicated it intends to address criticism that its capital regime proposals are too complex and onerous for small firms, and risk stifling competition, with the publication of a consultation paper  CP7/24 ‘The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs)’.

This proposes simplifications to all elements of the capital stack. Pillar 1 risk-weighted assets would be calculated using Basel 3.1 rules, with some simplifications for SDDTs, while Pillar 2 would be radically simplified, and there would be a single, more constant and predictable capital buffer.

The proposed implementation date for the simplified capital regime for SDDTs will be 1 January 2027. The consultation period closes on 12th December 2024.