- The proposals would put into effect the Basel Committee on Banking Supervision’s final package of banking prudential reforms
- It proposes to eliminate the use of internal models in certain areas
- It will reduce excessive variability in risk weight calculation
The Prudential Regulation Authority (PRA) of UK has launched a consultation on proposed rules and expectations that will be included in the Basel III standards but have yet to be implemented in the United Kingdom. It is known as Basel 3.1 standards.
PRA-regulated banks, building societies, and investment firms, as well as financial holding companies, will be subject to the proposed rules and regulations.
The proposals would put into effect the Basel Committee on Banking Supervision’s (BCBS) final package of banking prudential reforms developed in response to the global financial crisis.
The proposed measures would significantly alter the calculation of risk-weighted assets (RWAs) for risk-based capital ratios.
The proposal would improve risk measurement in internal models.
It is proposed to eliminate the use of internal models in certain areas, such as operational risk, credit valuation adjustment (CVA) risk, and so on.
It will lead to approach standardisation and reduce excessive variability in risk weight calculation. This will improve the consistency and comparability of the firm’s capital ratios, facilitating effective competition by closing the gap between risk weights calculated using internal models.
The proposal will limit the use of internal credit risk models in portfolios where there is insufficient loss data to reliably
RWAs derived using internal models cannot be less than 72.5% of RWAs derived using standardised approaches.
According to the PRA’s analysis, this approach is consistent with major financial jurisdictions such as Australia, Canada, Hong Kong, Singapore, and Switzerland.
The United States has not yet released its proposals.
So far, the European Commission has taken a different approach, with its proposals including several deviations from the Basel 3.1 standards as part of multi-year transitional arrangements.
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