PRA sets out adjustments to its market risk internal model approach under Basel 3.1

News release

The Prudential Regulation Authority (PRA) has today published a consultation on the internal model approach to market risk (IMA), which represents the final piece of Basel 3.1’s implementation in the UK.

Under Basel 3.1’s market risk rules – often referred to as the Fundamental Review of the Trading Book – banks calculate how much capital they must hold against potential losses from trading activities. This comes either through the standardised approach, which is simpler, but typically has higher capital requirements, or by developing their own internal models, which are typically used by larger firms with extensive trading operations, including international banks.

The PRA delayed implementing its IMA rules to provide time to consider the UK’s alignment to other major trading jurisdictions, taking into account the PRA’s competitiveness and growth objective given the very international nature of this part of banks’ activities.

Today’s consultation proposes several targeted changes to support international alignment and proportionality, including:

• Extending the monitoring period for the profit and loss attribution test from one year to three, to provide enough time for the PRA to gather data to confirm the appropriate calibration of the test before it could apply to calculating capital;
• Adjusting the PRA’s treatment of activity that has limited trading data to include a more targeted approach to identifying risks that cannot be modelled. This will allow more modelling where appropriate, delivering a more risk-sensitive capital framework;
• Reducing barriers to transitioning to full IMA approval by adjusting calculations for firms who use a mix of the internal models and standardised approaches, preventing a scenario where capital requirements could rise as firms move gradually on to IMA; and
• Introducing a number of operational simplifications and amendments to make the operation of the IMA more proportionate.

Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, said: 

“These rules mark the very last piece of the reform programme agreed between the UK and other major jurisdictions following the global financial crisis. 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 – today’s proposals do that, while ensuring that trading activities by banks in the UK are appropriately capitalised.” 

The PRA intends to implement its adjustments to the IMA on its previously-announced implementation date of 1 January 2028. No other changes are being proposed and all other rules come into force in January 2027, as previously planned. 

The PRA’s upcoming implementation of Basel 3.1 will build upon extensive work already done to support the UK’s economic growth while maintaining financial stability. This includes:

Notes to editors

1. Read the full consultation. 
2. Read the PRA’s final Basel 3.1 rules.