Basel 3.1¶

Basel 3.1 represents a significant overhaul of credit risk capital requirements, implemented in the UK through PRA PS1/26. It becomes effective on 1 January 2027.

Legal Basis¶

Key Changes from CRR¶

1. Removal of 1.06 Scaling Factor¶

The 1.06 multiplier applied to all IRB RWA is removed:

RWA = K × 12.5 × EAD × MA × 1.06

RWA = K × 12.5 × EAD × MA

2. Output Floor¶

An output floor ensures IRB RWA cannot fall below 72.5% of the equivalent SA RWA:

RWA_final = max(RWA_IRB, 0.725 × RWA_SA_equivalent)

Transitional Phase-In:

3. Removal of Supporting Factors¶

All CRR supporting factors are withdrawn:

4. Differentiated PD Floors¶

PD floors vary by exposure class instead of a uniform 0.03%:

5. A-IRB LGD Floors¶

New minimum LGD values for Advanced IRB:

*Values reflect PRA PS1/26 implementation. BCBS standard values differ (Receivables: 15%, CRE: 10%, RRE: 10%, Other Physical: 20%).

6. F-IRB Supervisory LGD Changes (CRE32)¶

Basel 3.1 recalibrates F-IRB supervisory LGD values:

7. Revised SA Risk Weights¶

Standardised Approach risk weights are recalibrated:

Corporate Exposures¶

New Corporate Sub-Categories (CRE20.47-49)¶

Real Estate Exposures¶

New risk weight approaches for real estate:

General Residential Real Estate — Loan-Splitting (PRA Art. 124F):

The PRA adopted loan-splitting for general residential (not income-dependent):

• Secured portion (up to 55% of property value) → 20% risk weight
• Residual → counterparty risk weight (75% for individuals per Art. 124L, 85% for non-retail SME, or the unsecured corporate RW)

Income-Producing Residential Real Estate — Whole-Loan (PRA Art. 124G, Table 6B):

Commercial Real Estate:

ADC Exposures (CRE20.85)¶

Acquisition, Development and Construction exposures receive a 150% risk weight (up from 100% under CRR).

Retail Exposures¶

Transactor status requires full repayment of outstanding balance each billing cycle. Payroll/pension loans are a new category for loans repaid directly from salary or pension.

Currency Mismatch Multiplier¶

For unhedged retail and residential real estate exposures where the lending currency differs from the borrower's income currency, a 1.5x risk weight multiplier applies (PRA PS1/26 Art. 123A / CRE20.76). The effective risk weight is capped at 150%. This is distinct from the 8% FX collateral haircut used in CRM (CRR Art. 224).

Defaulted Exposures¶

Defaulted exposures receive 100% SA risk weight. Provision-coverage-based differentiation (CRE20.87-90) is not currently implemented in the SA calculator — defaulted treatment with provision coverage is handled through IRB.

8. Input Floors for IRB¶

Beyond PD and LGD floors, Basel 3.1 introduces:

EAD Floors: - CCF cannot be lower than SA values for comparable exposures - A-IRB CCFs must be at least 50% of the SA CCF (CRE32.27) - Minimum 10% CCF for unconditionally cancellable facilities (vs 0% CRR)

Maturity: - Effective maturity floor: 1 year - Cap remains: 5 years

9. Large Corporate Correlation Multiplier (CRE31.5)¶

Large corporates (consolidated revenue > £500m) receive a 1.25x multiplier on their asset correlation under F-IRB. This increases capital requirements for exposures to large financial and non-financial corporates.

10. Due Diligence Requirements¶

Enhanced requirements for unrated exposures: - Institutions must perform internal assessment - Risk weight based on assessment quality - Documentation requirements

Risk Weight Tables (Basel 3.1)¶

Sovereign Exposures¶

Institution Exposures¶

External Credit Risk Assessment Approach (ECRA):

Standardised Credit Risk Assessment Approach (SCRA):

Subordinated Debt¶

Equity Exposures¶

Basel 3.1 significantly increases equity risk weights and removes IRB for equity (SA only).

Transitional phase-in schedule:

Under CRR, standard equities receive 100%, with some categories at 250% or 400%. The phase-in allows firms to gradually adjust to the higher capital requirements.

IRB Restrictions¶

Basel 3.1 restricts IRB usage for certain exposures (Art. 147A). For some classes, all IRB approaches are removed (SA only). For others, only A-IRB is removed (F-IRB with supervisory LGD remains):

IRB 10% RW floor for UK residential mortgages (PRA-specific): Non-defaulted retail exposures secured by UK residential property must have a minimum risk weight of 10% under IRB, regardless of model output. This is applied as a post-model adjustment.

CRM Changes¶

Haircuts¶

Supervisory haircuts are recalibrated under Basel 3.1 (CRE22.52-53), with significant increases for equities and long-dated bonds. Maturity bands expand from 3 (CRR) to 5 (Basel 3.1).

Key changes:

Maturity band expansion: CRR uses 3 bands (0-1y, 1-5y, 5y+). Basel 3.1 splits the longer bands into 5: 0-1y, 1-3y, 3-5y, 5-10y, 10y+. Short-dated haircuts (0-1y) are unchanged.

CRM Method Taxonomy¶

Basel 3.1 restructures CRM methods with clearer names and applicability:

Foundation Collateral Method overcollateralisation thresholds (Art. 230):

Guarantee Recognition¶

• Unfunded credit protection maintained
• G-10 sovereign guarantees: 0% RW
• Covered bond issuer guarantees: Enhanced treatment
• New requirement: Unfunded credit protection must include "change of control" provisions (transitional relief for pre-2027 contracts until June 2028)

Specialised Lending¶

Slotting remains available with updated risk weights:

SA Specialised Lending (Art. 122A-122B)¶

Basel 3.1 introduces explicit SA risk weights for specialised lending, separate from slotting:

High-quality operational project finance requires: low LTV, strong revenue predictability, contractual protections, and adequate refinancing capacity.

Configuration Example¶

from datetime import date
from rwa_calc.contracts.config import CalculationConfig

config = CalculationConfig.basel_3_1(
    reporting_date=date(2027, 1, 1),
)

# Internally sets:
# - scaling_factor: 1.0 (removed)
# - output_floor: 72.5% (with transitional schedule)
# - pd_floors: differentiated by class
# - lgd_floors: by collateral type

Implementation Timeline¶

gantt
    title Basel 3.1 Implementation Timeline
    dateFormat  YYYY-MM-DD
    section Milestones
    PRA PS1/26 Published     :done,    2024-09-01, 2024-09-30
    Industry Preparation     :active,  2025-01-01, 2026-12-31
    Basel 3.1 Go-Live        :         2027-01-01, 2027-01-01
    section Output Floor
    50% Floor                :         2027-01-01, 2027-12-31
    55% Floor                :         2028-01-01, 2028-12-31
    60% Floor                :         2029-01-01, 2029-12-31
    65% Floor                :         2030-01-01, 2030-12-31
    70% Floor                :         2031-01-01, 2031-12-31
    72.5% Floor (Final)      :         2032-01-01, 2032-12-31

Regulatory References¶

Next Steps¶

• CRR - Current framework
• Framework Comparison - Side-by-side comparison
• Calculation Methodology - How calculations work