LONDON (S&P Global Ratings) Sept. 12, 2024--S&P Global Ratings expects the final implementation of the Prudential Regulation Authority (PRA)'s Basel 3.1 standards to have only a modest effect on the overall capital held by banks. Furthermore, in our view, the new rules will have no meaningful impact on our measure of rated banks' risk-adjusted capitalization, nor on our ratings and outlooks.
The PRA confirmed today its near final rules for U.K. banks, which will be implemented as of Jan. 1, 2026--a six month delay from the previous July 1, 2025 implementation date, but leaving the U.K. in line with other major international jurisdictions. The PRA's near-final draft contained a handful of material changes, most prominently concerning:
- Amendments to the treatment of small and midsize enterprise (SME) lending;
- Amendments to the treatment of infrastructure lending;
- Lower conversion factors for off-balance sheet items;
- A simpler approach to the valuation of residential real estate; and
- An enhanced approach to calculating the credit risk output floor.
The regulator now estimates that total capital requirements for banks subject to the framework will rise by less than 1% at the end of the four-year implementation phase in January 2030. This is a relatively material decline from the 3.2% the PRA estimated last year and speaks to the collective impact of the bank's amendments, all of which have reduced overall capital requirement across Pillar 1 and Pillar 2A. Under Pillar 2A, the regulator aims to capture risks not easily or fully covered in a bank's Pillar 1 modelled capital requirements. As such, the fact that rising Pillar 1 charges for important balance sheet items like SME and infrastructure lending are now being tempered by bank specific Pillar 2A reductions is consistent with the PRA's original intentions.
This final capital impact of the near-final rules is much lower in the U.K. than in other jurisdictions like the U.S. (current estimate of about 9% for global systemically important banks, or 3.5%-4.5% for other large banks) and the EU (9.9% at full implementation). We think this divergence, in part, reflects the PRA's proactive implementation of the Basel 3.1 standards. For instance, since Jan. 1, 2024, U.K. banks have been subject to an amended view of credit risk in their internal models for mortgages, which has increased capital requirements materially for some of the country's major mortgage lenders.
Overall, the new capital rules will have a modest impact on our ratings on U.K. banks. Any modest rises in capital should feed through positively into our own risk adjusted view of bank capitalization, but this is unlikely to fundamentally change our view of their loss absorption capacity through capitalization and earnings. As such, we do not expect these new rules to affect our ratings or outlooks once fully implemented.
At the same time as it published its near final capital rules, the PRA published its Strong and Simple capital regime for Small Domestic Deposit Takers (SDDTs). This definition includes those firms with less than £20 billion of total assets, the vast majority of exposure in the U.K., limited trading activity, and who operate standardized credit risk models. The proposals introduce a new, simplified buffer framework on top of Pillar 1 and Pillar 2A requirements that focuses on stress testing SDDTs and calibrating additional capital needs accordingly, subject to a floor. This new framework aims to reduce the complexity of capital rules for small firms, without diluting their overall capital levels, and the PRA estimates a broadly neutral capital impact to relevant firms accordingly. The proposed implementation date for the Strong and Simple regime is Jan. 1, 2027.
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,600 credit analysts in 27 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analyst: | William Edwards, London + 44 20 7176 3359; william.edwards@spglobal.com |
| Secondary Contact: | Richard Barnes, London + 44 20 7176 7227; richard.barnes@spglobal.com |
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