The UK's implementation journey and proportionality
The UK’s path to implementation has evolved. The PRA initially planned for an earlier start date, but on 17 January 2025, it announced a two-year delay to 1 January 2027. This decision was made to allow more time for clarity to emerge around international implementation, particularly in the United States, thereby ensuring the UK's approach remains competitive.
A key objective of the PRA's approach has been proportionality. This has resulted in a unique, dual-framework system for UK firms.
The UK’s dual-framework approach: Basel 3.1 and SDDT
A core feature of the UK's implementation is its dual-track system, which applies the rules proportionately based on a firm's size, risk profile, and business model. The PRA has finalized the rules for these frameworks through a series of key consultations and policy statements.
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The Basel 3.1 framework for UK banks and investment firms
- This framework applies the full, enhanced Basel III standards. It is focused on large, internationally active, and other systemic institutions, including UK-incorporated banks, building societies, and designated investment firms that do not meet the criteria for the simpler regime.
- For Basel 3.1, the final rules are primarily set out across three key documents: PS17/23 (CVA and CCR), PS9/24 (Credit Risk, Output Floor), and PS1/26, which was published in January 2026 and finalizes the rules for the Market Risk (FRTB) framework.
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The Small Domestic Deposit Takers (SDDT) regime
- This is a simplified prudential framework designed for smaller, UK-focused banks and building societies that meet specific eligibility criteria.
- The final rules for the simplified capital and liquidity regime were confirmed in PS4/26, also published in January 2026. This supersedes near-final rules and establishes the complete framework.
A detailed analysis of the final Basel 3.1 framework
The final Basel 3.1 standards introduce fundamental reforms across all major risk categories.
Credit Risk: An overhaul of SA and IRB approaches
The final rules confirm a significant overhaul of credit risk calculations.
- The Standardised Approach (SA): The SA has been significantly enhanced to be more risk-sensitive, with updated risk weights for various exposures. To balance economic impact, the final rules confirm that the removal of the SME Support Factor under Pillar 1 will be offset by a new firm-specific SME Lending Adjustment in Pillar 2A. A similar Infrastructure Lending Adjustment is also applied.
- The Internal Ratings-Based (IRB) Approach: The PRA has finalized its restrictions on the use of internal models. The use of the Advanced IRB (AIRB) model is now restricted for exposures to institutions and large corporates (requiring a move to the FIRB model), and IRB modelling is removed entirely for exposures to central governments and equities.
Market Risk: FRTB framework
As confirmed in PS1/26, the existing market risk calculations are replaced entirely with three new approaches:
- Simplified Standardised Approach (SSA): For firms with limited derivatives activity.
- Advanced Standardised Approach (ASA): The new default method for most firms, consisting of the Sensitivities-Based Method (SBM), Default Risk Charge (DRC), and Residual Risk Add-on (RRAO). PS1/26 provides operational simplifications for Collective Investment Undertakings (CIUs), lowering the look-through approach (LTA) eligibility threshold to 50%.
- Internal Model Approach (FRTB-IMA): The PRA has confirmed a one-year delay for the FRTB-IMA, which will now be implemented on 1 January 2028. This allows firms to continue using existing IMA permissions for an interim period.
CVA, CCR, and Operational Risk
The final rules confirm a move towards greater standardization:
- Credit Valuation Adjustment (CVA): All internal models are eliminated and replaced with three risk-sensitive standardized methodologies.
- Counterparty Credit Risk (CCR): The transition is streamlined via updated reporting instructions for existing templates.
- Operational Risk: A single Standardised Approach replaces all legacy methods. Capital is now calculated based on the Business Indicator Component (BIC), with the PRA confirming that the Internal Loss Multiplier (ILM) is set to 1 for all UK firms.
The Output Floor: A capital backstop
The final rules confirm the Output Floor as a "backstop" to ensure that an IRB firm’s total Risk-Weighted Assets (RWAs) are no less than 72.5% of the RWAs calculated using only the revised Standardised Approaches. The rules clarify the calculation methodology and confirm a transitional path until 2030 to help firms manage the significant capital impact.
The SDDT Regime: Final rules and key features
With the publication of PS4/26, the PRA has confirmed the final rules for the SDDT capital regime.
- Implementation dates: The main capital regime takes effect on 1 January 2027. However, certain rules regarding the frequency of ICAAP/ILAAP updates took effect early on 20 January 2026.
- Key features:
- Simplified capital base: The regime removes the requirement to calculate capital for CVA and CCR for most eligible firms.
- The Single Capital Buffer (SCB): The complex "buffer stack" is officially replaced with a single, consolidated buffer.
- Streamlined governance: The ICAAP framework is simplified, and the frequency of ILAAP reviews is reduced.
Regnology: Your partner for Basel 3.1 and SDDT compliance
Navigating these complex final regulations requires robust, reliable technology. Our deep domain expertise in implementing the Basel frameworks, regulatory reporting, and risk management is embedded in our Regnology Reporting Hub, ensuring you can navigate this transition efficiently and confidently.
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