PRA publishes final Basel 3.1 rules

What does this mean?

PS1/26 provides firms with regulatory certainty on implementation timelines, transitional arrangements and supervisory expectations, and reflects the PRA’s consideration of feedback received in earlier consultations when finalising the framework. The practical impact of the PRA’s requirements will differ by risk area.

The most material changes confirmed by the PRA arise in market risk, reflecting revised implementation timelines, transitional arrangements and associated reporting and disclosure changes. For credit risk there are a series of targeted corrections and clarifications that are important for implementation, which do not alter the underlying policy framework. Operational risk sees more limited updates, focused on clarifying the application of the Basel 3.1 standardised approach. The sections below summarise the key implications for banks across market risk, credit risk and operational risk.

Market risk

The key change for banks is the delay to the implementation of the market risk internal model approach (FRTB-IMA) to 1 January 2028, while the rest of Basel 3.1 applies from 1 January 2027. During 2027, banks may continue to use existing internal model permissions for eligible positions, with out-of-scope positions required to be capitalised under the advanced standardised approach (ASA).This creates a transitional hybrid framework for some firms.

In response to industry feedback, the PRA has reduced the look-through approach threshold for collective investment undertakings (CIUs) to 50% (initially proposed at 90%) - easing the operational burden - alongside clarifications on how the “value” of CIUs should be estimated when assessing compliance with this threshold, and confirmation that closed-ended investment funds may be treated as listed equity.

The policy statement further confirms a permissions regime for the residual risk add-on (RRAO), allowing banks to seek approval to use an alternative methodology where the add-on would not be commensurate with the risk profile.

PS1/26 also finalises the PRA’s approach to the capitalisation of foreign exchange positions under the market risk framework. The PRA clarifies that certain balance sheet items held at historical exchange rates shall be excluded from the Pillar 1 market risk calculation, while confirming that any resulting contingent foreign exchange risk should be considered under Pillar 2. The policy statement also clarifies the requirements regarding the use of structural FX permissions, including clarification of the level of application and calculation of eligible positions. These changes are intended to ensure consistent application of FX risk requirements without materially altering overall capital outcomes. 

Finally, PS1/26 aligns market risk reporting and disclosure with the revised timelines. Basel 3.1 Pillar 3 disclosures apply from 1 January 2027, while FRTB-IMA reporting and disclosure templates are deferred to 1 January 2028, with existing IMA templates used during the interim period.

Key considerations during the transitional period

During the transition to FRTB-IMA, firms are expected to apply the following:

• Output floor calculations: All firms, regardless of whether they hold IMA permissions, must calculate capital using the Advanced Standardised Approach (ASA) for the purposes of the output floor.

• Trading book boundary: The Basel 3.1 trading book boundary applies from 1 January 2027 and is not affected by the delay to FRTB-IMA. Firms must apply the new boundary during the interim period, even where existing IMA permissions continue to be used.

• Specific risk types: For securitisations, credit derivatives and correlation trading portfolios where firms do not have IMA approval for specific risk, capital may continue to be calculated using the existing standardised approach.

• Internal hedges: Firms may continue to include interest rate internal hedge positions within their existing IMA trading book portfolios, rather than capitalising them separately as would be required under FRTB-IMA.

Credit risk

Credit risk changes in PS1/26 are targeted and corrective, rather than introducing a new policy direction. The PRA focuses on clarifying definitions and fixing drafting issues as the framework moves fully into the PRA Rulebook, improving legal and operational certainty.

Key changes include updates to transitional arrangements to reflect the revised 2027 implementation date and clarifications on the treatment of multi-currency revolving facilities and SME exposures involving natural persons, addressing inconsistencies in PS9/24.

PS1/26 also introduces important clarifications for real estate exposures, particularly around when property revaluations are required and how legacy valuations should be treated. Within the IRB framework, the PRA aligns permissions with the revised timeline and corrects a substantive error by confirming that the LGD input floor for unsecured retail exposures is 30%, not 25%, directly affecting capital calculations for some portfolios.

The policy statement also makes limited clarifications to the credit risk mitigation framework and related permissions to support consistent application.

Operational risk

For operational risk, PS1/26 formally withdraws SS14/13, reflecting the removal of the advanced measurement approach and the move to the Basel 3.1 standardised approach. The PRA also clarifies aspects of the Business Indicator calculation, including the treatment of the current financial year and the use of loss data, improving consistency in application across firms.

In summary, PS1/26 results in limited change for firms without IMA permissions, beyond implementing Basel 3.1 as planned from 1 January 2027. For IMA firms, however, the one-year deferral of FRTB-IMA provides an additional implementation runway, albeit within a transitional hybrid framework during 2027.

What do firms need to do?

Banks are generally well progressed with their implementation of Basel 3.1. However, PS 1/26 provides additional clarity for firms. In light of the publication firms should also prioritise the following: 

Boards should seek assurance over RWAs and reporting: In the context of significant changes as a result of implementation of Basel 3.1 (and the associated Pillar 2 ‘rebasing’ exercise) Boards should seek assurance over RWAs and reporting to the PRA. 

Manage transitional arrangements and governance: Firms should update Basel 3.1 implementation plans to reflect the confirmed transition, including implementation from 1 January 2027 and the delayed FRTB-IMA start date of 1 January 2028. Firms using, or intending to apply for, FRTB-IMA should ensure appropriate governance, model scope definition and transition planning are in place for the interim period, including reviewing existing IMA permissions, planning for any required amendments or revocations, and recognising that legacy IMA permissions will automatically expire at the end of the interim period.

Assess and implement targeted changes and clarifications: Firms should identify portfolios and processes affected by PS1/26 clarifications, particularly in market risk (e.g. CIU treatment, residual risk add-ons) and credit risk (e.g. LGD floors, valuation requirements), and implement any required changes to models, methodologies, systems or controls. These impacts are likely to be more pronounced for firms applying for, or operating, internal market risk models, but should be assessed and addressed by all firms for completeness.

Prepare reporting and disclosure processes: Firms should align regulatory reporting and Pillar 3 disclosure processes with the revised timelines, ensuring readiness for Basel 3.1 disclosures from 2027 and, where relevant, FRTB-IMA reporting and disclosures from 2028.

Next steps

Firms should finalise Basel 3.1 readiness for 2027 and, in line with the PRA’s 2026 supervisory priorities, assess and evidence the completeness and accuracy of Basel 3.1 capital calculations. Firms pursuing FRTB-IMA should also complete transition planning and proactive supervisory engagement ahead of 2028.