A recent webinar by Scottish firm ALMIS International has taken a greater deep dive into the capital framework and how it is changing in the UK.
Taking part in the webinar were Stuart Fairley, head of client experience at ALMIS, Lisa Twyman, head of financial regulation at Hodge Bank and Oivind Andresen, principal, financial services advisory at BDO.
The discussion centered in understanding Basel 3.1 & SDDT Capital Requirements and how they tie in with the changing capital framework. The Basel 3.1 reforms were finalized in December 2017, but implementation was delayed due to COVID, with the current UK implementation scheduled for 1 January 2026, following earlier moves from 2025.
The panel kicked off discussed the recent timeline of Basel 3.1, looking across from 2017 all the way to looking ahead to 2026.
Furthermore, they jumped into the SDDT eligibility criteria. For example, if a firm is a UK-based institution, the requirement is that it doesn’t have a non-UK parent. Meanwhile, on credit risk, the requirement is no approval to assess credit risk under IRB approach.
Fairley discussed changes to the terminology of the capital framework, for example, outlining how in Pillar 1 exposure class definitions have altered. For example, the exposure class for subordinated debt, equity and other own funds instruments would now include venture capital and private equity exposures, currently treated as exposures associated with particularly high risk.
On credit risk, it was highlighted that exposures to institutions can receive a lower risk weighting where the residual maturity is three months under the current rules. This is changing to original maturity under the Basel 3.1 framework.
Fairley also outlined that for firms implementing Basel 3.1, there is a requirement to undertake due diligence on their counterparties and apply the higher risk weighting of at least one credit step more where this due diligence gives reason to believe the credit risk of the exposure is higher than the counterparty’s external credit rating indicates.
Operational risk will also be changing in Pillar 1, with a new standardised approach replacing the current BIA/SA and AMA approaches. This will be applicable to both Basel 3.1 and SDDT firms.
To learn more about changing requirements with the UK’s capital framework, you can view the webinar here.
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