Equity Approach Specification¶

Equity exposure treatment under SA and IRB, including CIU look-through and Basel 3.1 transitional schedule.

Regulatory Reference: CRR Articles 132 (omitted)–133, 155; PRA PS1/26 Articles 132–132C, 133, 147A

Test Group: CRR-J

Requirements Status¶

CRR SA Equity Risk Weights (Art. 133)¶

Art. 133(2): "Equity exposures shall be assigned a risk weight of 100%, unless they are required to be deducted in accordance with Part Two, assigned a 250% risk weight in accordance with Article 48(4), assigned a 1250% risk weight in accordance with Article 89(3) or treated as high risk items in accordance with Article 128."

Basel 3.1 SA Equity Risk Weights (PRA PS1/26 Art. 133)¶

Significant increase in equity risk weights under Basel 3.1:

Classification Decision Tree¶

Is it subordinated debt / non-equity own funds instruments?
  → Yes: 150% (Art. 133(5))
Is it legislative equity (government-mandated, Art. 133(6) carve-out)?
  → Yes: 100% (Art. 133(6))
Is it listed on a recognised exchange?
  → Yes: 250% (Art. 133(3))
Is it higher risk (unlisted AND business < 5 years)?
  → Yes: 400% (Art. 133(4))
Otherwise (unlisted, business ≥ 5 years, including PE/VC not meeting higher-risk criteria):
  → 250% (Art. 133(3))

CRR IRB Equity Approaches (Art. 155)¶

Art. 155(1) gives firms with IRB permission three approaches for equity, to be chosen consistently and not for regulatory arbitrage:

1. Simple Risk Weight Approach (Art. 155(2))
2. PD/LGD Approach (Art. 155(3))
3. Internal Models Approach (Art. 155(4))

Equity exposures deducted under Part Two or assigned 250% under Art. 48 are excluded from Art. 155 altogether.

Simple Risk Weight Approach — Art. 155(2)¶

Short cash positions and derivatives held in the non-trading book may offset long positions in the same individual stock provided the hedge is explicit and covers at least one year. Other short positions are treated as long with the relevant RW applied to their absolute value.

PD/LGD Approach — Art. 155(3)¶

Under the PD/LGD approach, equity risk-weighted exposure amounts are calculated using the Art. 153(1) corporate IRB formula (same K × 12.5 × 1.06 × EAD × MA mechanics), with equity-specific PD floors (Art. 165(1)) and LGD values (Art. 165(2)):

Key rules (Art. 155(3)):

• M = 5 years for all equity under PD/LGD (Art. 165(3)).
• Where the firm does not have sufficient information to use the default definition in Art. 178, a scaling factor of 1.5 is applied to the risk weights.
• The per-exposure capital is capped: EL × 12.5 + RWEA ≤ EAD × 12.5 — i.e. the PD/LGD output cannot require more capital than a 100% loss assumption.
• Unfunded credit protection may be recognised per Chapter 4 but the guarantor LGD is 90% (65% only if the hedged exposure is PE in a sufficiently diversified portfolio).
• EL = PD × LGD (using the Art. 165 PD floor and the relevant 65%/90% LGD); EL is not deducted — for equity, EL enters the expected-loss cover test against provisions under the general IRB machinery.

Internal Models Approach — Art. 155(4)¶

The IMA risk-weighted exposure amount is 12.5 × potential loss on the institution's equity exposures, where potential loss is derived from an internal VaR model at the 99th percentile, one-tailed confidence level on the difference between quarterly returns and an appropriate risk-free rate, computed over a long-term sample period.

Floor (Art. 155(4)): The portfolio-level RWEA under IMA must not be lower than the sum of:

• the RWEA that would be produced under the PD/LGD approach (Art. 155(3)), and
• the corresponding expected-loss amounts × 12.5,

each computed using the Art. 165(1) PD values and Art. 165(2) LGD values.

IMA requires PRA permission (embedded in the general Art. 143 IRB permission). Unfunded credit protection may be recognised on an equity position.

Art. 165 — Equity Minimum PD Values and LGDs¶

Art. 165 sets the IRB equity-specific inputs referenced by Art. 155(3) and (4):

The 0.09% / 0.40% / 1.25% values in Art. 165(1) are the PD floors used inside Art. 155(3) (PD/LGD) and as inputs to the Art. 155(4) IMA floor; they do not modify the flat risk weights of Art. 155(2), which are already calibrated.

Art. 153(3) — Double-Default Adjustment for Guaranteed Exposures¶

Art. 153(3) provides a double-default credit-protection adjustment for IRB exposures (including equity under Art. 155(3)) meeting the Articles 202 and 217 requirements on the guarantor and the protection contract:

Risk-weighted exposure amount (double-default) = RW × exposure value × (0.15 + 160 × PD_pp)

where PD_pp is the PD of the protection provider and RW is the risk weight computed from the obligor's PD but the guarantor's LGD (comparable direct exposure). The maturity factor b uses the lower of the obligor and protection-provider PD.

IRB Equity Removal Under Basel 3.1¶

Under Basel 3.1 (PRA PS1/26 Art. 147A), all three IRB equity approaches (Simple, PD/LGD, Internal Models) are removed. All equity exposures must use SA risk weights (Art. 133). This is a mandatory restriction — firms cannot opt to continue using IRB equity methods.

CIU Treatment (Pre-omission Art. 132)¶

Collective Investment Undertakings (CIUs / funds) have three possible treatments under the pre-omission UK CRR Art. 132 framework. Recall that Art. 132 was omitted from UK CRR by SI 2021/1078 with effect from 1 January 2022; the paragraph references below are the pre-omission citations preserved here for historical and pre-2022 reporting completeness. The equivalent live UK rules through 31 December 2026 sit in the PRA Rulebook (CRR firms — Standardised Approach Part); from 1 January 2027 they are reintroduced as PRA PS1/26 Art. 132A (look-through and mandate-based) and Art. 132B (exclusions) — see Basel 3.1 Equity Approach Specification.

Look-Through Approach (pre-omission Art. 132(4))¶

Where the firm has sufficient information about the CIU's underlying holdings:

• Each underlying exposure is risk-weighted as if directly held
• The CIU's leverage is applied to gross up the risk weights
• Requires daily knowledge of the fund's composition

Reintroduced under Basel 3.1 as PRA PS1/26 Art. 132A(1) (and Art. 152(4) for IRB CIUs).

Mandate-Based Approach (pre-omission Art. 132(5))¶

Where full look-through is not available but the fund's mandate is known:

• The fund is assumed to invest to the maximum extent permitted by its mandate in the highest-risk asset class
• Then the next highest-risk class, and so on until the maximum total investment capacity is filled
• This produces a conservative weighted-average risk weight

Reintroduced under Basel 3.1 as PRA PS1/26 Art. 132A(2) (and Art. 152(5) for IRB CIUs).

Fallback Approach (pre-omission Art. 132(2))¶

Where neither look-through nor mandate-based approaches are feasible:

The 1,250% fallback originates from CRR2 (Regulation 2019/876) and is carried forward unchanged in PRA PS1/26 Art. 132(2). This is a punitive weight designed to incentivise firms to use look-through or mandate-based approaches.

Equity Transitional Schedule (PRA Rules 4.1–4.10)¶

PRA PS1/26 provides a transitional phase-in for the increased equity risk weights from 2027 to 2030. The transitional has two distinct pathways depending on whether the firm had IRB permission at 31 December 2026.

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 IRB permission under Art. 143 of CRR on 31 December 2026.

Standard equity (Rule 4.2 — modifies Art. 133(3)):

Higher-risk equity (Rule 4.3 — modifies Art. 133(4)):

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. These firms bifurcate their equity portfolio per Rule 4.5:

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

CIU Transitional (Rules 4.7–4.8)¶

During the 3-year transition period (2027–2029), Rules 4.7–4.8 apply to firms with IRB permission at 31 December 2026. CIU equity underlyings that were subject to the simple risk weight approach (Art. 155(2)) use the higher of the old simple risk weight and the transitional SA equity weight from Rules 4.2/4.3.

Opt-Out (Rules 4.9–4.10)¶

Firms may elect to skip the transitional and apply full Basel 3.1 steady-state weights (Art. 133: 250%/400%) immediately. This election is irrevocable and requires prior PRA notification. The opt-out covers both direct equity (Rules 4.5–4.6) and CIU underlyings (Rule 4.8).

See the Basel 3.1 Equity Approach Specification for detailed requirements and acceptance test scenarios.

Key Scenarios¶

CRR SA Equity (Art. 133) — CRR-J1 to CRR-J9¶

CRR IRB Simple Equity (Art. 155) — CRR-J10 to CRR-J14¶

CIU Specific Tests — CRR-J15 to CRR-J17¶

CRR-J16 calculation: the 1.2× third-party multiplier (pre-omission Art. 132(5), third sub-paragraph, third-party calculation provision) scales the mandate risk weight: RW = 0.80 × 1.2 = 0.96 (96%). Under PRA PS1/26 the same 1.2× multiplier sits in Art. 132A(2).

RWA Arithmetic Verification — CRR-J18 to CRR-J20¶

Basel 3.1 Equity Scenarios¶

Basel 3.1 equity scenarios are documented in the dedicated Basel 3.1 Equity Approach specification (test group B31-L).

Acceptance Tests¶