Equity Approach Specification¶

Basel 3.1 equity treatment: new SA risk weight regime (250%/400%), removal of IRB equity approaches, transitional phase-in schedule, and CIU treatment.

Regulatory Reference: PRA PS1/26 Art. 132–133, Art. 147A(1)(h), Rules 4.1–4.10 Test Group: B31-L

Requirements Status¶

Overview¶

Basel 3.1 fundamentally changes equity treatment by:

1. Removing IRB equity — Art. 147A(1)(h) prohibits use of IRB approaches for equity
2. Introducing differentiated SA weights — replacing CRR's flat 100% (Art. 133(2)) with sub-category-specific weights (250%/400%)
3. Adding a transitional schedule — phasing in the higher weights over a 3-year window (1 January 2027 – 31 December 2029), with steady-state Art. 133 weights applying from 1 January 2030

Key Changes from CRR¶

SA Equity Risk Weights (Art. 133)¶

Risk Weight Table¶

Higher-Risk Classification (Art. 133(4))¶

An equity exposure is classified as higher risk (400%) if both of the following conditions are met (PRA PS1/26 Glossary, p.5):

1. Not listed on a recognised exchange, AND
2. The underlying business has existed for less than five years

The five-year clock starts from the date the business was first established within the undertaking. Where the business was transferred from another entity, the start date depends on whether the risk profile substantially changed on transfer (Glossary p.5, conditions (a)–(b)).

All other equity (not subordinated debt, not higher-risk) receives the standard 250% weight under Art. 133(3), including listed equity, government-supported equity, and unlisted PE/VC where the business has existed for five years or more.

IRB Equity Removal (Art. 147A(1)(h))¶

Under Basel 3.1, all equity exposures must use the Standardised Approach. The following CRR approaches are no longer available:

• IRB Simple (Art. 155) — exchange-traded 290%, PE diversified 190%, other 370%
• IRB PD/LGD — modelled PD with 90% LGD floor
• Internal Models — VaR-based equity capital

The removal is implemented in the equity calculator's approach determination:

# Basel 3.1: IRB equity removed — all equity uses SA
if not resolved_pack.feature("equity_irb_approaches_available"):
    return EquityApproach.SA

Under CRR, the calculator returns IRB_SIMPLE if any exposure class has F-IRB or A-IRB permission.

Transitional Phase-In (Rules 4.1–4.10)¶

Both the SA equity transitional (Rules 4.1–4.3) and the IRB equity/CIU transitional (Rules 4.4–4.10) run for three years: from 1 January 2027 to 31 December 2029, with the steady-state Art. 133 weights (250%/400%) applying from 1 January 2030 onward. The two pathways are textually distinct in PS1/26 Appendix 1, Chapter 4, and apply to different populations of firms.

Comparative timeline — equity transitional regimes¶

Phase-In Schedule (Rules 4.2–4.3)¶

The Rule 4.2/4.3 schedule below is the operative phase-in for the SA-only track and is also the floor leg of the IRB-track "higher of" tests in Rules 4.6 and 4.8.

The transitional works as a floor:

final_rw = max(assigned_rw, transitional_floor_rw)

During the transitional period, the floor ensures exposures receive at least the phase-in weight, even if the calculator would assign a lower weight.

Transitional Exclusions¶

The following equity sub-categories are excluded from the transitional floor (their weights apply directly without a phase-in floor):

• Central bank (0%) — already below the floor, exclusion is moot
• Subordinated debt / non-equity own funds (150%) — fixed rate (Art. 133(5))
• CIU look-through — weight derives from underlying assets, not Art. 133
• CIU mandate-based — weight derives from fund mandate, not Art. 133

SA Transitional (Rules 4.1–4.3) — Firms Without IRB Permission¶

Rule 4.1 restricts Rules 4.2–4.3 to firms that did not have permission to use the IRB Approach (Art. 143 of CRR) on 31 December 2026. These firms apply the phase-in schedule above directly to all equity exposures over the three-year window 1 January 2027 – 31 December 2029 (Rule 4.2 chapeau, Rule 4.3 chapeau). From 1 January 2030 the steady-state Art. 133(3)/(4) weights (250%/400%) apply without any transitional modification.

IRB Transitional (Rules 4.4–4.6) — Firms With IRB Permission¶

Rule 4.4 scopes Rules 4.5–4.6 to firms that had IRB permission on 31 December 2026, and bounds those rules to the "IRB equities and CIU transition period" — which Rules 4.5/4.6 implicitly tie to Rules 4.2/4.3, i.e. 1 January 2027 – 31 December 2029 (3 years). From 1 January 2030, the steady-state Art. 133(3)/(4) weights apply directly with no legacy-IRB "higher of" test.

These firms bifurcate their equity portfolio per Rule 4.5:

1. SA equities (Rule 4.5(1)): Equity exposures that were on the Standardised Approach (Art. 148 or Art. 150 of CRR) at 31 Dec 2026 use the same phase-in schedule as Rules 4.2/4.3 above.
2. IRB equities (Rules 4.5(2) + 4.6): Equity exposures that were on the IRB Approach (Art. 143 of CRR) at 31 Dec 2026 use the higher of:
   • the risk weight from the firm's legacy IRB methodology (Art. 155 of CRR, as in force on 31 Dec 2026), and
   • the transitional SA risk weight from Rules 4.2 or 4.3.

This "higher of" test provides a floor-based transition — IRB firms cannot produce risk weights below the transitional SA schedule, but retain their legacy IRB weights where those are higher.

CIU Transitional (Rules 4.7–4.8) — Firms With IRB Permission¶

During the same three-year IRB equities and CIU transition period (1 January 2027 – 31 December 2029) scoped by Rule 4.7, Rule 4.8 applies to firms that had Art. 143 IRB permission on 31 December 2026. For CIU equity underlyings that were subject to the simple risk weight approach (Art. 155(2) of CRR, as in force before 1 Jan 2027), the firm assigns the higher of:

• the old simple risk weight (CRR Art. 155(2)), and
• the transitional SA equity weight from Rules 4.2/4.3.

This applies when using look-through (Art. 132A(1) / Art. 152(4)) or mandate-based (Art. 132A(2) / Art. 152(5)) approaches. From 1 January 2030 the standard Art. 132A / Art. 152 CIU treatment applies without the legacy Art. 155(2) floor.

Opt-Out (Rules 4.9–4.10) — Firms With IRB Permission¶

Instead of Rules 4.5–4.6 and 4.8, a firm with IRB equity/CIU permission at 31 Dec 2026 may elect under Rule 4.9 to apply:

• full steady-state Art. 133 weights immediately (250%/400%) for direct equity, and
• standard CIU treatment (Art. 132A / Art. 152) without the simple risk weight floor.

This election is irrevocable: Rule 4.10 requires prior notice to the PRA and, once exercised, prevents the institution from later returning to Rules 4.5–4.8. The opt-out covers both direct equity and CIU underlyings — a firm cannot opt out of one while retaining the other (Rule 4.9(1) and 4.9(2) are jointly elected). The opt-out is meaningful only during 2027–2029; from 1 January 2030 every firm is on the steady-state Art. 133 / Art. 132A regime regardless of the election.

Transitional provisions (Rules 4.1–4.10) — PDF citations¶

This section anchors the transitional phase-in rules to verbatim text from PS1/26 Appendix 1 (docs/assets/ps126app1.pdf). The Rules sit in Chapter 4 ("TRANSITIONAL PROVISIONS") of the Credit Risk: Standardised Approach (CRR) Part.

Rule 4.1 — Scope gate for SA-only firms (PS1/26 App 1, p.20)¶

"4.2 and 4.3 only apply to an institution that did not have permission to use the Internal Ratings Based Approach under Article 143 of CRR on 31 December 2026."

Rule 4.2 — Standard SA equity transitional (PS1/26 App 1, p.20)¶

"This rule modifies paragraph 3 of Credit Risk: Standardised Approach (CRR) Part Article 133 for a transitional period beginning with 1 January 2027 and ending with 31 December 2029, in which equity exposures that are not higher risk equity exposures or within the scope of paragraph 6 of Credit Risk: Standardised Approach (CRR) Part Article 133 shall be assigned the following risk weights:

(1) 160% during the period beginning with 1 January 2027 and ending with 31 December 2027; (2) 190% during the period beginning with 1 January 2028 and ending with 31 December 2028; and (3) 220% during the period beginning with 1 January 2029 and ending with 31 December 2029."

From 1 January 2030, the steady-state 250% under Art. 133(3) applies directly — there is no Rule 4.2(4).

Rule 4.3 — Higher-risk SA equity transitional (PS1/26 App 1, p.21)¶

"This rule modifies paragraph 4 of Credit Risk: Standardised Approach (CRR) Part Article 133 for a transitional period between 1 January 2027 and 31 December 2029, in which equity exposures that are higher risk equity exposures and are not within scope of paragraph 6 of Credit Risk: Standardised Approach (CRR) Part Article 133 shall be assigned the following risk weights:

(1) 220% during the period beginning with 1 January 2027 and ending with 31 December 2027; (2) 280% during the period beginning with 1 January 2028 and ending with 31 December 2028; and (3) 340% during the period beginning with 1 January 2029 and ending with 31 December 2029."

Rules 4.4–4.6 — IRB transitional: max(legacy Art. 155, SA transitional) (PS1/26 App 1, p.21)¶

Rule 4.4 is the IRB-track scope gate (the equivalent of Rule 4.1 on the SA-only track) and is also the textual anchor for the 3-year duration of the IRB equity transitional. It introduces the term "the IRB equities and CIU transition period" that is then referenced throughout Rules 4.5–4.8:

"4.4 During the IRB equities and CIU transition period, 4.5 to 4.6 apply by way of derogation from the treatment laid down in paragraph 3 of Credit Risk: Standardised Approach (CRR) Part Article 133 to an institution which, on 31 December 2026, had permission to apply the Internal Ratings Based Approach under Article 143 of CRR."

Rule 4.5 bifurcates the firm's equity portfolio; Rule 4.6 is the "higher of" test that ties IRB-track weights to the Rule 4.2/4.3 dates (1 Jan 2027 – 31 Dec 2029) by reference:

"4.6 Subject to 4.9, an institution shall calculate the risk weight for each equity exposure as the higher of:

(1) the risk weight calculated using the relevant methodology used by the institution as specified in its permission to use the Internal Ratings Based Approach under Article 155 of CRR as that provision was in force on 31 December 2026; and (2) the risk weight calculated under 4.2 or 4.3."

This means IRB equity firms do not get a "pure legacy Art. 155" transition — their post-2026 weight can never fall below the Rule 4.2/4.3 schedule, and the transition itself ends with Rules 4.2/4.3 on 31 December 2029.

Rules 4.7–4.8 — CIU look-through / mandate-based equity underlyings (PS1/26 App 1, pp.21–22)¶

Rule 4.7 mirrors Rule 4.4 for the CIU pathway and confirms that CIU look-through / mandate-based equity underlyings share the same 3-year "IRB equities and CIU transition period":

"4.7 During the IRB equities and CIU transition period, 4.8 applies by way of derogation from the treatment laid down in Credit Risk: Standardised Approach (CRR) Part Article 132A and Credit Risk: Internal Ratings Based Approach (CRR) Part Article 152 to an institution which, on 31 December 2026, had permission to apply the Internal Ratings Based Approach under Article 143 of CRR."

"4.8 Subject to 4.9, an institution which calculates risk weights of CIUs using:

(1) the look-through approach in paragraph 1 of Credit Risk: Standardised Approach (CRR) Part Article 132A or paragraph 4 of Credit Risk: Internal Ratings Based Approach (CRR) Part Article 152; or (2) the mandate-based approach in paragraph 2 of Credit Risk: Standardised Approach (CRR) Part Article 132A or paragraph 5 of Credit Risk: Internal Ratings Based Approach (CRR) Part Article 152,

shall assign a risk weight to each underlying exposure in the CIUs to which the institution would have applied the simple risk weight approach in accordance with point (a) of paragraph 4 of Standardised Approach and Internal Ratings Based Approach to Credit Risk (CRR) Part Article 152, as that provision was in force before 1 January 2027, by using the higher of:

(3) the risk weight that would have applied to the underlying exposure under the simple risk weight approach set out in Article 155(2) of CRR, as that provision was in force before 1 January 2027; and (4) the risk weight calculated under 4.2 or 4.3."

Only equity underlyings that would have qualified for Art. 155(2) legacy simple risk weight treatment are within scope of Rule 4.8; non-equity underlyings of CIUs flow through the usual Art. 132A/Art. 152 pathways without a transitional floor.

Rules 4.9–4.10 — Irrevocable opt-out into steady-state (PS1/26 App 1, p.22)¶

Rule 4.9 lets an IRB-permission firm skip Rules 4.5–4.8 and apply the steady-state Art. 133 / Art. 132A / Art. 152 treatment from 1 January 2027. Rule 4.10 is the irrevocability provision, requiring prior PRA notice and locking the firm out of any future return to the transitional approaches:

"4.9 Subject to 4.10, instead of using the alternative approaches set out in 4.5, 4.6 and 4.8, an institution may choose to calculate both:

(1) risk weights for equity exposures in accordance with Credit Risk: Standardised Approach (CRR) Part Article 133, instead of in accordance with the two approaches set out in 4.5 and 4.6; and

(2) risk weights of exposures underlying CIUs within the scope of 4.8(1) and 4.8(2) in accordance with:

(a) if the institution has an IRB Permission, Credit Risk: Internal Ratings Based Approach (CRR) Part Article 152;

(b) if the institution does not have an IRB Permission, Credit Risk: Standardised Approach (CRR) Part Article 132A."

"4.10 An institution shall give the PRA prior notice of its use of the approaches in 4.9. Once an institution uses the approach in 4.9 it shall not use the approaches in 4.5 to 4.8."

Note that the opt-out applies jointly to direct equity (Rule 4.9(1)) and CIU equity underlyings (Rule 4.9(2)) — the Rule 4.9 chapeau requires the institution to "calculate both" categories under steady-state Art. 133 / Art. 132A / Art. 152 if it elects out of the transitional regime.

CIU Treatment (Art. 132, 132a, 132b)¶

Collective Investment Undertakings (CIUs) — funds, ETFs, unit trusts — have three treatment options depending on the firm's knowledge of the fund's holdings:

1. Look-Through Approach (Art. 132a)¶

When the firm can identify the CIU's underlying holdings:

• Each underlying is risk-weighted per its own exposure class and CQS
• A value-weighted average RW is computed across all holdings
• Leverage adjustment (Art. 132a(3)): when fund_nav > 0, RWA is grossed up by dividing total value by NAV, capturing the effect of fund leverage

ciu_rw = sum(holding_value_i x rw_i) / fund_nav

Fallback if look-through data is incomplete: 250% (B31) / 150% (CRR).

2. Mandate-Based Approach (Art. 132b)¶

When the firm knows the fund's investment mandate but not individual holdings:

• The fund's mandate defines the maximum risk-weight-applicable class
• ciu_mandate_rw is set based on the mandate's highest-risk category
• Third-party calculation factor (Art. 132(4)): if the RW is calculated by a third party (not the firm), multiply by 1.2×

Default mandate RW if not specified: 250% (B31) / 150% (CRR).

3. Fallback Approach (Art. 132(2))¶

When neither look-through nor mandate-based is available:

CIU Approach Selection¶

The approach is determined by the ciu_approach input column:

PRA Notification — Third-Country "Relevant CIU" Exposures (Art. 132(8))¶

PS1/26 introduces a new UK-specific notification regime for institutions whose CIU exposures are managed from outside the UK. It is not a risk-weight rule — it is a firm-governance reporting obligation that sits alongside the SA equity / CIU calculations and feeds into PRA supervisory oversight of third-country fund-management concentrations.

Definition — "Relevant CIU" (PS1/26 Art. 1.2 Glossary, p.27)¶

"relevant CIU means a CIU:

(1) that is managed by a company which is registered in a third country; and

(2) for which an institution applies the look-through approach in accordance with Article 132A(1) or the mandate-based approach in accordance with Article 132A(2) to calculate the risk-weighted exposure amount for their exposures in the form of units or shares in the CIU."

The definition is scope-limited to third-country-managed CIUs for which the institution actually uses look-through or mandate-based. CIUs falling back to the 1,250% Art. 132(2) treatment are outside the "relevant CIU" perimeter and do not contribute to the Art. 132(8) thresholds. The trigger is third-country fund-management domicile, not the CIU's country of establishment, and not any AML/CFT assessment of either jurisdiction.

Verbatim Art. 132(8) (PS1/26 App 1, pp. 64–65)¶

"8.

(a) An institution shall notify the PRA if either:

(i) the total risk-weighted exposure amounts for all of its exposures in the form of units or shares in relevant CIUs exceed 0.5% of the institution's total risk-weighted exposures for credit risk and dilution risk calculated in accordance with Title II of Part Three of CRR and the Credit Risk: General Provisions (CRR) Part, the Credit Risk: Standardised Approach (CRR) Part, the Credit Risk: Internal Ratings Based Approach (CRR) Part, the Credit Risk Mitigation (CRR) Part and the Counterparty Credit Risk (CRR) Part; or

(ii) the total exposure values for all of its exposures in the form of units or shares in relevant CIUs exceed GBP 500 million;

in each case calculated on an individual or consolidated basis.

(b) An institution shall make the notification in point (a) of this paragraph promptly if:

(i) at any time either of the thresholds in point (a)(i) or (ii) of this paragraph is reached; and

(ii) until such time as it makes a notification under point (c) of this paragraph, on an annual basis thereafter.

(c) An institution which has made or is required to have made a notification under point (a) of this paragraph shall also notify the PRA promptly when both the total risk-weighted exposure amounts and total exposure values are below the relevant thresholds set out in point (a)(i) and (ii) of this paragraph.

(d) An institution shall include in the notification made under point (a) of this paragraph:

(i) a list of the countries in which fund managers of all relevant CIUs to which it is exposed are located; and

(ii) the total exposure values and total risk-weighted exposure amounts in respect of its exposures in the form of units or shares in relevant CIUs for each of those countries."

Plain-English Summary¶

Distinction from Other PRA Notification Triggers¶

There is only one Art. 132 PRA notification regime in PS1/26 — Art. 132(8). Plan items D4.58 ("AML/CFT, ≥2% of own funds") and D4.66 ("GBP 2 billion RWA") both refer to the same underlying Art. 132(8) provision but with incorrect attributions, incorrect thresholds, and an incorrect AML/CFT trigger that is not in PS1/26 at all. The genuine Art. 132(8) provision is summarised above.

The output-floor disclosure (Art. 92(5)) and the IRB equity opt-out notice (Rule 4.10) are unrelated notification regimes that operate on different triggers and are not within Art. 132's scope.

CRR Comparison¶

Operational Implementation¶

The Art. 132(8) regime is a firm-governance and reporting obligation that sits outside the RWA calculator's scope. The calculator may still flag exposures as is_relevant_ciu = True for downstream COREP / firm-level aggregation, but the calculation of whether either threshold is breached, and the production of the per-country breakdown, are operational tasks owned by the firm's CIU inventory and PRA-reporting workflow.

For the matching COREP changes — including the new "of which: exposures to relevant CIUs" rows in the relevant template — see COREP reporting changes and the CIU user-guide page.

Waterfall Precedence¶

When classifying equity exposures, the following priority order applies:

1. CIU (Art. 132) — if the exposure is a fund holding
2. Central bank / sovereign equity — 0% (sovereign treatment, not Art. 133)
3. Equity (Art. 133) — 250%/400% by sub-category, including subordinated debt (150%, Art. 133(5)). Art. 133(6) is an exclusion clause, not a risk weight.
4. High-risk (Art. 128) — 150% (re-introduced in B31, see SA Risk Weights)

Equity exposures take priority over high-risk classification. PE/VC that meets the higher-risk definition (unlisted + business < 5 years) is classified as equity (Art. 133(4), 400%), not high-risk (Art. 128, 150%). PE/VC that does not meet the higher-risk definition receives standard 250% (Art. 133(3)).

Key Scenarios¶

Acceptance Tests¶