The Prudential Regulation Authority (PRA) has issued a consultation proposing updates to its Pillar 2A methodologies and guidance, as the first phase of a two-stage review intended to reflect the consequential impacts of its near-final Basel 3.1 implementation and to improve transparency and proportionality in how Pillar 2A capital is set. The proposals are relevant to PRA-regulated banks, building societies, designated investment firms and PRA-approved or PRA-designated holding companies, but not credit unions. For credit risk, the PRA proposes to remove the internal ratings-based (IRB) benchmarking approach and replace it with two systematic methodologies addressing areas where it considers Pillar 1 standardised requirements may often be understated, covering certain non-UK central government and central bank exposures and regional government and local authority exposures that can attract preferential risk weights, and retail unconditionally cancellable commitments (UCCs) via a prescribed conversion factor reference point of 20% (with an option for firms to evidence a lower portfolio-derived factor, no less than 10%). It also proposes ICAAP expectations for firm-designed, high-severity 12-month credit scenarios, and to cut reporting by streamlining FSA076 and decommissioning FSA077 and FSA082. For operational risk, the PRA does not propose to change its Pillar 2A methodology, but would introduce clearer ICAAP scenario analysis expectations (including a soundness standard comparable to a 99.9% one-year confidence interval) and publish more detail on the factors it considers when setting add-ons. For pension obligation risk, it proposes removing two PRA-prescribed stress scenarios and reducing assessment and reporting where schemes are fully bought-in or have an accounting funding ratio of at least 130%. For market risk and counterparty credit risk, it would publish additional information on existing Pillar 2A assessment methodologies and update ICAAP reporting expectations, without changing the underlying approach. The PRA has extended the consultation deadline to 30 September 2025 and revised its proposed implementation date for the pension and market risk and counterparty credit risk changes to 1 July 2026. The credit and operational risk proposals would continue to be aligned with the PRA’s Basel 3.1 implementation date of 1 January 2027, with new methodologies applied when firms’ Pillar 2 capital requirements are reset at the first full Capital Supervisory Review and Evaluation Process after implementation; a voluntary data collection on wholesale UCCs is due by 31 March 2026. The PRA plans a second-phase consultation to undertake a deeper review of individual Pillar 2A methodologies after this phase is completed.

Original source View in tracker