PRA Proposes Targeted Adjustments to Market Risk Internal Models Under Basel 3.1

The Prudential Regulation Authority (PRA) has published a consultation on adjustments to the internal model approach (IMA) for market risk, the final component of Basel 3.1 implementation in the UK. The IMA allows banks to calculate capital requirements for trading book positions using their own models, subject to PRA approval. The PRA delayed IMA rules to align with other major jurisdictions and support competitiveness. Proposed changes include extending the profit and loss attribution test monitoring period from one to three years, refining treatment of limited trading data to allow more modelling, reducing barriers to transitioning to full IMA approval, and introducing operational simplifications. Sam Woods, Deputy Governor for Prudential Regulation and CEO of the PRA, stated the rules complete the post-crisis reform programme and ensure appropriate capitalisation of UK bank trading activities. The IMA adjustments will be implemented on 1 January 2028, while other Basel 3.1 rules take effect in January 2027. The PRA also highlighted broader efforts supporting growth and stability, including the Financial Policy Committee's capital benchmark cut from 14% to 13%, the Strong and Simple framework for smaller firms, and increased MREL thresholds.