UK Basel 3.1: Credit risk standardised approach – real estate exposures
On 30 November 2022, the Prudential Regulation Authority (PRA) published a Consultation Paper 16/22 (CP16/22) proposing the implementation of Basel 3.1 standards. The framework was originally proposed to be implemented on January 1, 2025. However, according to the news release dated September 27, 2023, the revised implementation date is July 1, 2025. A brief summary of the changes proposed to ‘real estate exposures’ under the credit risk standardised approach is provided below.
Key changes to real estate exposures (Article 124), under the standardised approach, include:
A new exposure class (‘real estate exposures’) replaces the existing ‘exposures secured by mortgages on immovable property’ and ‘speculative immovable property financing’^
More granular classification based on exposure type into ‘regulatory real estate’^^, ‘Acquisition, Development and Construction (ADC)^^^ exposures’ and ‘other real estate’ categories
Risk weight ranging from 20% to 150% based on exposure type
Residential real estate exposures to natural persons where the currency mismatch exists are subject to a risk weight multiplier of 1.5, subject to a maximum risk weight of 150%. [Article 123B]
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^Currently getting reported under ‘Items Associated with Particular High Risk’ (Article 128).
^^Regulatory real estate exposure’ should meet all the following requirements:
it is finished;
there is legal certainty on claims over the property;
the exposure is secured by a first charge over the property;
an assessment is made on the ability of the borrower to repay;
it is prudently valued; and
adequate documentation is maintained.
^^^An exposure to a corporate or special purpose entity financing any land acquisition for development and construction purposes or financing development and construction of any residential or commercial real estate.
A summary of the proposed classifications and associated risk weights is given below:
*‘Residential real estate’ means a property that predominantly has, or will have, the nature of a dwelling and where the property satisfies the applicable laws and regulations enabling it to be occupied for housing purposes. The following exposures will not qualify for residential real estate:
care homes,
purpose-built student accommodation,
property that is predominantly used for holiday lets
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** Exposure treated as materially dependent on the cash flows generated by the property, if: (Article 124D)
Secured on a house in multiple occupation (HMO); or
The repayment over a representative period otherwise materially depends on the cash flows generated by the property
Exceptions:
Secured by a property that is the borrower’s primary residence
A residential real estate exposure to an individual, and the individual has no more than two other mortgaged properties (the three property limit)
A residential real estate exposure to a public housing company or not-for-profit association
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***Risk weights based on LTV:
Existing (Basel 3.0) classification and Risk Weights:
Proposed (Basel 3.1) classification and Risk Weights:
