PRA consults on implementation of Basel III standards in the UK
As a result of the financial crisis which started in 2007-2008, the Basel Committee on Banking Supervision (the "BCBS") published a series of reforms to the regulatory capital framework amended to ensure that banks were more highly capitalised and able to withstand sudden losses to both their trading and non-trading books in the future, and so to substantially increase the resilience of the banking system. These measures were known as the Basel III standards.
Some of these reforms were implemented into EU law through the Capital Requirements Regulation ("CRR") and EU Level 2 Delegated Regulations, both of which have been onshored in the UK under statutory instruments made under the European Union (Withdrawal) Act 2018. However, a number of the Basel III reforms, including (i) the Pillar 1 net stable funding ratio (“NSFR”) requirements, (ii) the new market risk requirements under the Fundamental Review of the Trading Book ("FRTB"), (iii) the revised counterparty credit risk rules, and (iv) the large exposure rules, were contained in the Capital Requirements Regulation 2 ("CRR2") which does not come into force in the EU until 28 June 2021, after the end of the Brexit transition period, and therefore were not capable of being onshored as retained EU law. The UK government has instead decided to implement these reforms pursuant to the framework set out in the Financial Services Bill ("FS Bill"). The PRA will be given powers under the FS Bill both to make rules that restate elements of the CRR and delegated regulations revoked by HM Treasury ("HMT"), and to make new PRA rules in those areas to give effect to the outstanding Basel III rules. These new PRA rules broadly correspond to the drafting contained in CRR2, on the basis that CRR2 was designed to implement the outstanding Basel III standards and was negotiated between 2016 and 2019, during which the UK "contributed significantly to its design". In certain cases, however, the UK has diverged from the CRR2 drafting as highlighted in this report. The PRA makes clear that the rationale for such divergence is to achieve closer alignment with the Basel standards, enhance proportionality and enable the new PRA rules to interact clearly and effectively with the requirements that remain in CRR. The current timing is for the implementation of the PRA rules to take place from 1 January 2022, which is 6 months later than the implementation of most EU CRR2 standards.
We set out below a summary of the key revisions proposed by the PRA and, where relevant, an explanation of the divergence from the CRR2 drafting. There are more aspects of the PRA’s proposals that might be relevant to you such as reporting and disclosures which are not analysed in this summary.