PRA PS17/23 Compliance: Summary of key changes, implications, and what banks should be doing

On 12th December 2023, the PRA published PS17/23 [1], outlining near final rules for Basel 3.1 compliance. The changes are consistent in terms of reinforcing the significant requirements stemming from CP16/22 that was published in November 2022. In this regard, there is significant work required from banks on data management, model development, model validation, controls, processes and regulatory reporting.

Overall, as a result of the changes, the PRA expects Tier I capital to increase by 3.2% for major UK firms at the end of the January 2030 transitional period. It is worth noting that this increase is lower than expectations from previous impact studies and compares favourably with expected increases in other jurisdictions such as the EU (9.9% when fully phased in) and the US (16% for large holding companies and 9% for depository institutions at the end of the proposed transitional period).

Summary of key changes and implications

The key areas covered by PS17/23 are market risk, counterparty credit risk (CCR), credit valuation adjustment (CVA) risk, operational risk, the Pillar 2 framework and currency redenomination. The remaining components, namely, credit risk capital (Standardised Approach and IRB), credit risk mitigation, the output floor, Pillar 3 disclosure and reporting requirements are expected to be finalised in Q2 2024. The overall aims for the PRA for PS17/23 include:

• Improving the risk sensitivity of the standardised approach for market risk, CVA risk, counterparty credit risk and operational risk and lowering the calibration of aspects of SA-CCR (e.g. Alpha reduction for pension funds and non-financial counterparties).

• Constraining the use of internal models (IMs), with complete removal of IM approaches for CVA and operational risk. This is to facilitate comparability and reduce the unwarranted variability of Risk Weighted Assets (RWAs) across firms.

The expected implementation date has been shifted by 6 months from 1st Jan 2025 to 1st July 2025, with a 4.5 year transitional period, taking into account the implementation timelines for other regulatory jurisdictions.

Amendments were made to CP16/22 that was published on 30th November 2022, based on responses from around 126 respondents. Aspects of flexibility, proportionality, operational burden and overall capital impact were taken into consideration when updating the policy requirements. The key material changes in PS17/23 include:

• Removal of the ability for firms to receive internal model permission for the default risk of sovereign exposures.

• Introducing a smoother transition for firms where existing CVA capital exemptions are being removed (i.e. sovereigns, non-financial counterparties, and pension funds),

In terms of capital impact, the PRA expects the standards to increase Tier I capital by 3.2% for major UK firms at the end of the 1st January 2030 transitional period. In comparison other jurisdictions estimate the capital impact as follows:

• Tier I capital requirements for EU firms are expected to increase by 9.9% when fully phased in.

• Tier I capital requirements for US firms are expected to increase by 16% for large holding companies and 9% for depository institutions at the end of the proposed transitional period.

Therefore, a key takeaway is that there are substantial differences in Basel 3.1 capital impacts globally and hence a non-level playing field, with opportunities for regulatory capital optimisation for global banks.

What banks should be doing

July 2025 is certainly not far away and there is a lot of work for banks to do. Banks should take the following actions immediately:

• Complete self-assessments against the PS17/23 standards, performing an uplift to already completed CP16/22 self assessments. Through this process they should identify any gaps in data management processes, model development, validation, management/regulatory reporting, performance monitoring and documentation. Banks should formulate effective roadmaps for timely gap remediation and socialise this with senior management. This will help in proactive communication with the regulator and will be key to achieving Basel 3.1 compliance in a timely manner.

• Assess the incremental capital impact to market risk, CVA risk, counterparty credit risk and operational risk, based on the changes in PS17/23 standards. Banks should ascertain whether there is any merit to updating their internal model applications for market risk or SA-CVA applications. These changes should be communicated to senior management as soon as possible, so that they understand key strategic levers that can be pulled (e.g., portfolio composition, hedging and risk management activities) to influence regulatory capital. Furthermore, global banks should identify capital optimisation opportunities by structuring trading activities to benefit from differing regulatory capital treatments between the UK, EU and the US, especially for market risk and CVA.

• Identify incremental changes to data requirements, especially critical data elements pertaining to trade, market and reference data required to satisfy capital reporting requirements, thereby ensuring that any changes to data models and governance processes are planned accordingly.

• Identify incremental changes to processes and controls, especially those pertaining to data quality checks, reconciliations, capital reporting, capital add-ons and adjustments.

• Plan model development efforts and associated model validation timelines effectively to meet the July 2025 implementation timeline. Furthermore, banks should identify and plan documentation enhancements required to satisfy Basel 3.1 compliance as early as possible, including business requirements, functional requirements, test evidence. methodology, validation, and policy/procedure documentation.

Summary

PS17/23 represents a significant effort for banks in terms of data management, model development, model validation, processes, controls and regulatory reporting for market risk, CVA risk, counterparty credit risk and operational risk.

In achieving PS17/23 compliance, banks should:

• Conduct timely gap analysis.

• Perform robust capital impact analysis for market risk, CCR, CVA risk and operational risk.

• Assess changes to data requirements.

• Assess changes to processes and controls.

• Plan model development and validation exercises, including documentation enhancements to satisfy Basel 3.1 compliance.

In this regard, senior management buy-in and understanding of the capital impact and associated strategic levers are key to achieving Basel 3.1 compliance by July 2025.

How 4most can help

Founded in 2011, 4most have grown to become one of the leading independent credit risk, market risk and actuarial consultancies in the UK, Europe and the Middle East. 4most’s team of risk experts can help banks with regulatory gap analysis, data management, model development, model validation, process re-engineering, documentation enhancement and delivering customised risk management training.

For further questions regarding Basel 3.1 implementation, please don’t hesitate to contact us.

Ram Ananth – Head of Market Risk: ram.ananth@4-most.co.uk