PS9/24: Key changes when implementing Basel 3.1 rules

On 12 September 2024, the Prudential Regulation Authority (PRA) issued PS9/24, marking the second part of the near-final ruleset that addresses credit risk, the output floor, and Pillar 3 disclosures.

These rules were accompanied by supervisory statements on Internal Ratings-Based (IRB) approaches and the definition of default. The PRA also released consultation papers covering Pillar 2A, the definition of capital, the UK's capital buffer framework, and the 'strong and simple' framework for small domestic deposit takers (SDDT).

This post delves into the key elements of PS9/24, examines its potential impact on UK banks, and highlights the actions firms should take to comply by the 2026 deadline.

PS9/24: Key changes when implementing Basel 3.1 rules

These releases are a critical milestone in the process to the UK implementing the Basel 3.1 rules. Here’s a quick summary of the key changes in the policy statement:

💡The date for compliance is set: Firms have until 1st January 2026 to prepare, at which time the regulatory requirements are implemented, with a 4-year transition period

💡The impact will be smaller than previously expected: The PRA estimates that the Tier 1 capital requirements for major UK banks in aggregate are likely to increase less than 1% by the end of the transition period (compared to 3.2% estimated in PS17/23)

💡Key concerns around SME and infrastructure lending supporting factors have been addressed: The PRA confirmed the removal of the support factor for both SME and infrastructure lending, but committed that no bank would see an increase in capital requirements as an adjustment would be made through Pillar 2A.

💡Further risk sensitivity has been introduced for SME’s and infrastructure loans and off-balance sheet items: The definition of an SME is simplified and additional risk sensitivity is introduced with lower rw% for the highest-quality SME and infrastructure loans. The PRA also used new evidence to justify reducing the proposed conversion factors (CFs) for some off-balance sheet items.

💡Residential real-estate valuation rules have been made clearer: The PRA have clarified that the use of AVMs is allowed. The approach to using origination valuation to determine LTV for regulatory capital requirements has also been updated to allow periodic valuation reassessments to ensure long-term lending is not unfairly disadvantaged.  The approach to reflecting downward valuations has also been made clearer and simpler.

💡The output floor calculation is updated to align with the standardised approach: The calculation has been amended to reflect that the treatment of accounting provisions varies between IRB and SA.

PS9/24: What firms should do next

The long-anticipated release of these rules allows firms to finalise their approach to Basel 3.1 compliance and regulatory capital strategy. Firms should now:

💼Interpret the final rules: a clear assessment of the changes to the current regulatory requirements and the impact that these changes will have from a financial and operational perspective.

💼Plan for how the changes can be implemented before the 2026 deadline: update process and procedure across finance, risk and compliance and ensure that the correct data is available to implement the changes.

🔐Consider the impacts to short and long-term strategy: reflect on the finalised rules as a whole and consider both threats to your existing business model and opportunities to optimise your regulatory capital strategy.