The Prudential Regulation Authority published near-final Policy Statement PS18/25, providing feedback on consultation responses and setting out its near-final policy to retire the Pillar 2A “refined methodology” alongside the implementation of the Basel 3.1 standardised approach to credit risk. The statement also finalises minor clarification updates to the Pillar 2A approaches for interest rate risk in the banking book (IRRBB) and pension obligation risk. On the refined methodology, the PRA maintained its consulted approach despite most respondents opposing the change, concluding that Basel 3.1 calibration and related changes (including the output floor and changes to internal ratings-based modelling of real estate exposures) should sufficiently narrow the gap between standardised and IRB risk weights. The PRA expects the combined effect of Basel 3.1 and retiring the refined methodology to be broadly neutral on average for firms’ total capital requirements and buffers, with around half of firms currently subject to the methodology expected to see reductions, and it declined to introduce a transitional phase, opting for full removal on “Day 1”. For IRRBB and pension obligation risk, the PRA made clarification and editorial amendments to Statement of Policy 5/15 and Supervisory Statement 31/15 without changing the underlying approaches, while deferring implementation of two proposed IRRBB-related changes pending a separate IRRBB methodology review. Retiring the refined methodology will take effect from 1 January 2027, reflecting the one-year delay to the UK’s Basel 3.1 implementation and the resulting removal of the Interim Capital Regime. The IRRBB and pension obligation risk clarifications will take effect from 1 July 2026. Final policy materials for retiring the refined methodology are expected in Q1 2026, alongside, or shortly after, the PRA’s final policy statement covering the full Basel 3.1 package, which the PRA links to HM Treasury making commencement regulations to revoke relevant provisions of the Capital Requirements Regulation.
Prudential Regulation Authority 2025-10-28
Prudential Regulation Authority confirms retirement of the Pillar 2A refined methodology from 1 January 2027 and finalises IRRBB and pension risk clarifications
The Prudential Regulation Authority (PRA) published near-final Policy Statement PS18/25, detailing the retirement of the Pillar 2A “refined methodology” and the implementation of the Basel 3.1 standardised approach to credit risk. Despite opposition, the PRA maintained its approach, expecting the changes to be broadly neutral for firms' capital requirements. Clarifications to interest rate risk in the banking book and pension obligation risk policies were made, with some changes deferred pending further review.