PRA eases Basel 3.1 market risk rules for UK banks
The UK regulator has proposed targeted tweaks to trading book capital rules, preventing sudden capital increases for major banks transitioning to internal models.
The Prudential Regulation Authority has launched a consultation on the internal model approach to market risk, finalizing the UK’s implementation of Basel 3.1 rules. These adjustments, set to take effect on 1 January 2028, will dictate how much capital major banks must hold against trading book losses.
For large, internationally active banks, internal models are crucial. They typically result in lower capital requirements than the standardised approach, though they are significantly more complex to operate. The PRA deliberately delayed these specific rules to assess how other major jurisdictions were implementing the same global standards, aiming to protect the competitiveness of UK trading operations.
The proposed changes are designed to smooth the transition for lenders. Notably, the regulator will adjust calculations for firms using a mix of standardised and internal models. This prevents a scenario where a bank’s capital requirements artificially spike as it gradually shifts onto full internal model approval.
The PRA is also extending the monitoring period for the profit and loss attribution test from one year to three. This gives the regulator more time to gather data and properly calibrate the test before it dictates actual capital holdings. Additionally, the authority plans to refine how it treats trading activity with limited data, allowing for more modelling where appropriate to create a more risk-sensitive framework.
“These rules mark the very last piece of the reform programme agreed between the UK and other major jurisdictions following the global financial crisis,” said Sam Woods, Deputy Governor for Prudential Regulation and CEO of the PRA. “We’ve allowed some extra time to implement this last set of rules in order to be able to take account of how they are being implemented elsewhere.”
Wider capital relief
The consultation fits into a broader regulatory push in the UK to ease capital burdens while maintaining financial stability. It follows the Financial Policy Committee’s recent decision to cut the sector’s capital benchmark from 14% to 13%.
The PRA has also introduced a "Strong and Simple" framework for smaller domestic lenders and raised the thresholds for own funds and resolvability reporting, focusing the heaviest regulatory burdens strictly on the largest, most complex firms. All other Basel 3.1 rules remain on track for implementation in January 2027.
