The Prudential Regulation Authority (PRA) published a near-final policy statement setting out how it will apply SME and infrastructure lending adjustments within Pillar 2A as part of its implementation of the Basel 3.1 standards. The adjustments are designed to ensure that removing the SME and infrastructure support factors from Pillar 1 does not increase firms’ overall capital requirements for eligible SME and infrastructure exposures. The near-final approach applies to PRA-authorised banks and building societies, PRA-designated investment firms, and in-scope holding companies, but not to credit unions. Eligibility is based on the former Capital Requirements Regulation (CRR) support factor criteria and prior PRA supervisory expectations, including that the SME adjustment should not apply where borrowing supports buy-to-let business, and it covers eligible exposures originated both before and after Basel 3.1 implementation. Adjustments will be firm-specific and calculated as a function of the change in risk-weighted assets from removing the support factors (ΔRWA) and a firm-specific capital adjustment factor reflecting the firm’s capital stack, with defined exceptions and modified calculations for certain standardised approach and slotting exposures to avoid double discounts or imprudent reductions. The methodology is applied based on the underlying Pillar 1 credit risk approach and will not be recalculated solely because a firm becomes bound by the output floor. Firms must submit specified data templates to receive the adjustments, with a one-off “day 1” calculation to be made via an off-cycle review aligned to the PRA’s Basel 3.1 data collection exercise, and subsequent submissions alongside ICAAPs in line with the C-SREP cycle. The policy is intended to take effect on the same date as the PRA’s Basel 3.1 implementation, which the PRA expects to be 1 January 2027, and the PRA notes that a final policy statement for the full Basel 3.1 package will follow once HM Treasury has made the necessary commencement regulations.
Prudential Regulation Authority 2025-05-22
Prudential Regulation Authority sets near-final Pillar 2A SME and infrastructure lending adjustments for Basel 3.1
The Prudential Regulation Authority (PRA) released a near-final policy statement detailing adjustments for SME and infrastructure lending within Pillar 2A under Basel 3.1 standards. These adjustments aim to prevent increased capital requirements for eligible exposures by removing support factors from Pillar 1. The policy applies to PRA-authorised banks, building societies, and investment firms, with implementation expected on 1 January 2027.