Operationalisation of Basel 3.1

Operationalisation of Basel 3.1 - what to think about 

1. Capital Impact Assessment 

This should be a first step for firms as it will show how Basel 3.1 risk weights will impact their cost of capital. Based on the assessment, firms may decide to optimise lending and trading portfolios and explore new capital-raising options. Large banks subject to the output floor will need to gear capital under the new regime. The Prudential Regulation Authority (PRA) has requested an off-cycle data review to assess changes needed for Pillar 2 capital requirements based on the impact of Basel 3.1. Firms will need to provide impact assessments before key submission dates on their risk-weighted assets (RWAs) for the purpose of this review.

2. Data Governance

Basel 3.1 introduces new data requirements, necessitating a robust data governance approach suitable for a firm’s size and complexity. Complex firms may rely on metadata and automation, while smaller firms rely on manual controls and data stewardship. Firms must ensure they have the infrastructure to collect, store, and analyse data in alignment with Basel 3.1, which calls for more granular market data, historical data for internal models, and comprehensive reporting templates. This also directly links to the fact that Data Risk is a key supervisory priority for the PRA.  Recent PRA reviews have identified insufficient data governance, systems, and controls, especially related to regulatory reporting, within firms.

3. People and Transformation

 Implementing Basel 3.1 requires a cultural and organisation-wide approach to reduce non-compliance risk. Firms must foster a risk-aware culture by embedding accountability throughout, and ensuring employees understand the new regulatory requirements. This involves comprehensive training programs and continuous reviews. Firms should appoint an individual, or team charged with overseeing the implementation process, coordinating various functions to ensure alignment and efficient resource allocation thus enabling firms to remain agile while implementing the new rules.

4. Wider Regulatory Landscape

The new rules will intersect with existing and upcoming regulations, and firms should be prepared to integrate these regulations into their Basel 3.1 plans. Key regulations include:

• Leverage Ratio Framework: Changes in conversion factors for calculating off-balance sheet items will impact the exposure value.
• Outsourcing and Third-Party Risk Management: Firms relying on external vendors, such as property valuators, must comply with these rules for Basel 3.1 implementation.
• Model Risk Management Principles: This should be a primary focus for all firms, particularly those with IRB permissions, when adopting Basel 3.1.
• Pillar 2 Capital Requirements: These will likely be influenced by the new rules as evidenced by the PRA’s off-cycle data review.

By focusing on the aforementioned areas, firms can ensure day one compliance with Basel 3.1, while enhancing their overall risk management framework and strategic decision-making capabilities.

For further insight on your Basel 3.1 implementation plan, watch our recent webinar on Basel 3.1 operational priorities.

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