PS15/26 – Pillar 2A Review Phase 1: Final Policy

Overview

On 28 May 2026, the Prudential Regulation Authority (PRA) published Policy Statement PS15/26, setting out its final policy following consultation on CP12/25 as the first phase of a two-stage review of its Pillar 2A methodologies and guidance.

Pillar 2A capital requirements are designed to ensure firms hold sufficient capital for risks not fully or sufficiently captured by Pillar 1 requirements. This revision addresses the consequential impacts of implementing the Basel 3.1 rules and aims to improve information, guidance, transparency, and proportionality for firms.

While this PS is relevant to all PRA-regulated firms including SDDTs, the primary framework for SDDTs is addressed through separate publications. The credit risk proposals in this PS do not apply to SDDTs. For operational risk, this PS makes minor clarificatory updates to align the SDDT Pillar 2A operational risk methodology with that for non-SDDTs, building on the decisions set out in PS20/25 (near-final), which were subsequently finalised in PS4/26 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs) – final.

Timelines

All final policy and rules in this PS will take effect on 1 January 2027 across all risk areas, including credit, operational, pension obligation, market, and counterparty credit risk. This harmonises the CP’s staggered implementation dates into a single date to support firms’ planning and implementation.

ICAAPs signed off by boards in 2026 should include an impact assessment of the Basel 3.1 standards. ICAAPs signed off by boards from 1 January 2027 should be prepared on a Basel 3.1 basis, incorporating the impact of the final policy changes set out in this PS.

Key Changes

The key changes across all risk areas are outlined below:

Credit Risk:

The PS confirms significant updates to the Pillar 2A methodology for credit risk. Key final decisions include:

• Removing the Internal Ratings-Based (IRB) approach risk weight benchmarking methodology. The PRA has maintained its proposal to remove the benchmarking methodology, as the implementation of the Basel 3.1 rules will enhance the risk capture and risk sensitivity of the Standardised Approach (SA), such that SA risk-weighted assets will generally better reflect the relative riskiness of firms' portfolios. The PRA does not intend to publish benchmarks as a reference to support firms' own ICAAP assessments, as it considers these will be of limited benefit following Basel 3.1 implementation and would increase operational burden.

• Two systematic methodologies are confirmed to mitigate potential under-estimation of credit risk for certain exposure types under the Pillar 1 SA:

  - Application of minimum effective risk weights for specific exposures currently eligible for preferential risk weights under:

·        CRR Article 114(7): exposures to central governments and central banks, and

·        CRR Article 115(4): exposures to regional governments and local authorities.

The confirmed Pillar 2A minimum effective risk weights are as follows:

·        Non-UK Central Governments and Central Banks

o   CQS1 / MEIP[1] 0–1: No minimum

o   CQS2–3 / MEIP 2–3: 5%

o   CQS4–6 / MEIP 4–7 and Unrated: 20%

·        Non-UK Regional Governments and Local Authorities (RG/LA)

o   CQS1: 5%

o   CQS2–3: 20%

o   CQS4–6 and Unrated: 100%

Two changes from the CP: exposures secured by collateral recognised through the Financial Collateral Simple Method (FCSM) are excluded from this methodology; and RG/LA exposures subject to a CRM-eligible CG/CB guarantee will be subject to the CG/CB minimum effective risk weight rather than the higher RG/LA floor.

- Introduction of a prescribed Conversion Factor (CF) reference point of 20%[2] for revolving retail exposures classified as unconditionally cancellable commitments (retail UCCs).

One important change from the CP: SMEs have been removed from the scope of the systematic methodology for retail UCCs. The PRA acknowledged that the underlying data used to calibrate the methodology covered UCCs to individuals only, and recognised concerns about the potential impact on the availability of finance to SMEs.

• Interaction of systematic and idiosyncratic methodologies: Systematic add-ons constitute the baseline of a firm's Pillar 2A credit risk add-ons and cannot be reduced through the idiosyncratic assessment. A firm's total Pillar 2A credit risk requirement comprises the systematic components plus any additional idiosyncratic capital requirements.

• Idiosyncratic credit risk assessment: This is the most significant change from the CP. Rather than prescribing credit scenario analysis, the final policy gives firms greater flexibility to choose their own approach. Detailed assessments are expected only for a subset of SA exposures that are more likely to carry idiosyncratic credit risk not captured by Pillar 1 or systematic methodologies. These may include, but are not limited to:

  • Lending to niche markets susceptible to economic fluctuations and industry-specific challenges;

  • Product types that are new to the market;

  • Lending with higher than typical market pricing due to elevated risk factors;

  • Portfolios with a high variance in default rates over the previous 12 months; and

  • For mortgages: sub-prime and near prime lending, shared equity, lifetime mortgages and retirement interest only mortgages.

  Acceptable methodologies include credit scenarios, proxy IRB approaches, or other robust and proportionate approaches. A proxy IRB approach is one based on internal modelling similar to the Pillar 1 IRB approach. Firms using proxy IRB must provide sufficient detail for the PRA to understand the methodology and assumptions.

• Reporting: FSA076 is streamlined, and FSA077 & FSA082 are decommissioned. The Pillar 2A refined methodology will be retired from 1 January 2027 per PS2/26 – Retiring the refined methodology to Pillar 2A – final, and associated reporting will no longer be required.

[1] MEIP refers to ‘Minimum Export Insurance Premiums’ and applies to exposures rated by an Export Credit Agency.

[2]Firms will be able to use a lower, substantiated CF if they can demonstrate lower realised CFs.

Operational Risk:

The final policy confirms no changes to the Pillar 2A operational risk methodology, with the focus on transparency and clarity. Key decisions include:

• Scenario analysis expectations in SS31/15 are clarified for all firms. Smaller firms may use a simplified aggregation approach provided it is justified, and the resulting capital assessment remains prudent. Firms may draw on common underlying risk events across different regulatory frameworks, but the PRA does not consider it appropriate for a single scenario to be relied upon to meet multiple regulatory requirements.

• Transparency on the PRA's methodology: SoP5/15 clarifies the factors considered when setting Pillar 2A operational risk capital. The PRA focuses on losses from currently unknown misconduct events in its Pillar 2A assessment; known misconduct events are generally captured under Pillar 2B. Insurance is not permitted as a capital offset for Pillar 2A.

• Good practices for significant firms (generally Category 1 firms) are set out in SS31/15. These do not apply to non-significant firms or SDDTs.

• FSA072–075 template clarifications. Pillar 2 operational risk reporting is based on gross losses net of direct recoveries, excluding insurance recoveries. Significant firms report Level 1 event types in FSA072 and Level 2 breakdowns in FSA073.

• SDDT alignment: Minor clarificatory updates to SS4/25 and SoP5/25 align the Pillar 2A operational risk methodology for SDDTs with that for non-SDDTs, without creating new expectations for SDDTs.

The PRA expects most firms' total operational risk capital requirements to remain unchanged.

Market Risk and Counterparty Credit Risk:

The final policy confirms enhanced transparency on existing methodologies, without making changes to them.

For market risk, updated information covers illiquid risks, gap risk, intraday risks, non-interest rate risks on fair-valued positions, and syndicated loan underwriting. The PRA has clarified that intraday exposure can present a material risk for some firms, potentially requiring Pillar 2A capitalisation rather than merely monitoring. Credit Spread Risk in the Banking Book (CSRBB) is assessed under Interest Rate Risk in the Banking Book, not under the market risk 'other risks' subsection of SoP5/15.

For counterparty credit risk, updates cover settlement risk, credit risk mitigation residual risks, wrong-way risk, CCP exposures, and other tail risks including CVA volatility risk.

The PRA does not expect these changes to increase firms' total capital requirements for these risks.

Pension Obligation Risk:

The final policy confirms both proposals with one modification.

The two PRA-prescribed stress scenarios are removed from the FSA081 template, reducing disclosure burden without materially affecting the PRA's ability to assess Pillar 2A pension risk capital. The PRA will not publish further calibration guidance, such as on longevity risk, to preserve firms' own assessment responsibilities.

Firms with fully bought-in schemes or a funding ratio of at least 130% on an accounting basis are exempt from the full FSA081 submission and associated reporting requirements, applied on a scheme-by-scheme basis. One modification from the CP: insured annuities have been removed from the funding ratio definition, ensuring partially bought-in schemes with a significant residual surplus are not inadvertently excluded from the exemption. Firms should note that the FSCS should be excluded from residual risk assessments following a buy-in, and that a full FSA081 submission may still be required for the Bank Capital Stress Test.

Impact on Small and Medium-Sized Banks

The final policy is materially less burdensome for smaller and medium-sized firms than originally proposed. The shift to a flexible, firm-led approach to idiosyncratic credit risk assessment and the removal of SMEs from the retail UCC systematic methodology both reduce compliance costs and potential impacts on SME lending.

Following completion of Phase 1, the PRA intends to conduct a more in-depth review of certain Pillar 2A methodologies and publish a further consultation paper in 2027. This is expected to continue the PRA’s broader programme of improving transparency, guidance, and proportionality within the Pillar 2A framework.

How We Can Help

At Katalysys, we recognise the practical challenges these changes present, especially for smaller and medium-sized firms with limited internal capacity. Our specialist team offers tailored, pragmatic support to help you manage this transition effectively. We can assist you with:

• Pillar 2A Assessment Frameworks: Supporting the development or enhancement of internal Pillar 2A assessment processes — including idiosyncratic credit risk assessment design, proxy IRB approaches, and documentation aligned to PRA expectations.

• System, Data, and Scenario Readiness: Advising on data capture and scenario development to support the final reporting requirements and updated stress testing expectations.

• Staff Training and Practical Guidance: Delivering focused training sessions and technical briefings to build awareness and strengthen your teams’ ability to meet evolving regulatory expectations.

• Capital Impact Assessment and Planning: Quantifying the potential impact on your capital requirements and integrating these outcomes into your ICAAP, capital planning, and risk appetite frameworks.

Our experience in supporting firms through regulatory change will allow us to help you navigate the evolving landscape with confidence.

For more information, please contact:

Manish Patidar

Senior Director

Advisory

Josh Nowak

Managing Director

Advisory & Solutions