UK Basel 3.1 standards: Credit risk standardised approach – retail 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 ‘retail exposures’ under the credit risk standardised approach is provided below.
Key changes to retail exposure class (Article 123), under the standardised approach, include:
More granular classification based on exposure type into ‘regulatory retail’ (transactor and non-transactor) and ‘other retail’ categories
Risk weight ranging from 45% to 150% based on exposure type
New risk sensitivity factor (x 1.5) to be applied in the event of currency mismatch (i.e. if the currency of the exposure differs from the obligor’s main source of income)
Threshold updated from EUR 1 million to GBP 0.88 million
Note: Exposures secured by real estate properties are covered in a separate article. [Real estate exposures]
A summary of the proposed classifications and underlying criteria is given below:
*Any facility where the outstanding balance is permitted to fluctuate based on its decisions to borrow and repay, up to an agreed limit and in accordance with the terms of the facility agreement.
Existing and proposed Risk Weights:
1 Article 123B: If the currency of the exposure differs from the obligor’s main source of income, and there exists no natural or financial hedge between these, a factor of 1.5 is applied to the risk weight. For exposures incurred before the implementation date (i.e., 1 July 2025), the bank has the option to determine the currency mismatch based on the currency of the exposure and the domestic currency of the country of residence of the obligor (as a proxy).