AFME welcomes the UK PRA’s publication of elements of Basel 3.1 standards implementation

AFME has expressed its approval of the UK PRA release of key components of the Basel 3.1 standards, marking a significant step in implementing post-financial crisis reforms (eventid=24391). These standards, originally agreed upon in December 2017, are crucial for maintaining the UK’s status as a leading international financial center. AFME emphasized the importance of aligning with international standards, considering the role of the UK in global finance.
The recently published policies represent a milestone, particularly concerning the Basel 3.1 package, and are expected to enter into force in the UK. AFME sees these policies as essential for banks, playing a vital role in financing the real economy. The adjustments made, such as the recalibration of the alpha factor in the SA-CCR, aim to prevent disproportionate increases in capital requirements for banks and their potential impact on end-users‘ access to hedging products.
AFME acknowledges the PRA’s helpful adjustments in addressing default risk associated with sovereign bonds, emphasizing consistency between standardized approaches and internal models. The PRA’s rules require banks to use the standardized approach for central government and central bank exposures, which is seen as facilitating banks‘ market making in UK government bond markets to support the economy.
However, AFME points out areas for potential improvement, including greater differentiation in the treatment of regulated versus unregulated financial entities within the credit valuation adjustment framework. AFME suggests recognizing the lower risk of counterparties, such as insurance providers, that play a pivotal role in the real economy. The lack of recognition of insurance as a risk mitigant in the business indicator calculation in the operational risk framework is highlighted as inconsistent with other areas of the prudential framework, resulting in an overstatement of risk and disproportionate capital requirements.
Despite these considerations, AFME welcomes the clarity provided by the near-final policies and anticipates the release of remaining elements, including credit risk, the output floor, and reporting requirements, to comprehensively assess the impact of the Basel 3.1 package. They emphasize the need for a coordinated international implementation timeline and consideration of developments in major jurisdictions for global consistency without compromising the UK’s competitiveness.