Basel 3.1¶

Basel 3.1 represents a significant overhaul of credit risk capital requirements, implemented in the UK through PRA PS1/26. It becomes effective on 1 January 2027.

Legal Basis¶

Key Changes from CRR¶

1. Removal of 1.06 Scaling Factor¶

The 1.06 multiplier applied to all IRB RWA is removed:

RWA = K × 12.5 × EAD × MA × 1.06

RWA = K × 12.5 × EAD × MA

2. Output Floor¶

An output floor ensures IRB RWA cannot fall below 72.5% of the equivalent SA RWA:

RWA_final = max(RWA_IRB, 0.725 × RWA_SA_equivalent)

Transitional Phase-In:

Note: The PRA compressed the BCBS 6-year phase-in to 4 years. Art. 92 para 5: transitional rates are permissive — firms may use 72.5% from day one.

The full regulatory formula (Art. 92(2A)) is TREA = max{U-TREA; x × S-TREA + OF-ADJ}, where OF-ADJ reconciles the different treatment of provisions under IRB and SA. The output floor also does not apply to all entities — Art. 92(2A)(b)–(d) exempts certain entity/basis combinations (e.g., non-ring-fenced institutions on sub-consolidated basis, international subsidiaries on consolidated basis). See the Technical Reference for the OF-ADJ component formula and output floor spec for the full applicability table.

3. Removal of Supporting Factors¶

All CRR supporting factors are withdrawn:

4. Differentiated PD Floors¶

PD floors vary by exposure class instead of a uniform 0.03%:

5. A-IRB LGD Floors¶

Basel 3.1 introduces per-exposure input LGD floors for Advanced IRB, replacing the CRR Art. 164(4) portfolio-level mechanism (which required exposure-weighted average LGD ≥ 10% for retail residential RE and ≥ 15% for retail commercial RE). Corporate and retail floors are defined separately:

Corporate / Institution (Art. 161(5)):

Retail (Art. 164(4)):

*Values reflect PRA PS1/26 implementation. BCBS standard values differ (Receivables: 15%, CRE: 10%, RRE: 10%, Other Physical: 20%).

6. F-IRB Supervisory LGD Changes (Art. 161)¶

Basel 3.1 recalibrates F-IRB supervisory LGD values. Notably, senior unsecured LGD is now differentiated by whether the counterparty is a financial sector entity (FSE):

7. Revised SA Risk Weights¶

Standardised Approach risk weights are recalibrated:

Corporate Exposures¶

New Corporate Sub-Categories (Art. 122(6)–(11))¶

Short-Term Corporate ECAI (Art. 122(3), Table 6A)¶

New in Basel 3.1 — corporate exposures with a specific short-term ECAI assessment use Table 6A instead of the long-term Table 6. CRR has no equivalent short-term corporate table.

Real Estate Exposures¶

New risk weight approaches for real estate. All preferential RE risk weights require the exposure to be a regulatory real estate exposure per Art. 124A — satisfying six qualifying criteria covering property condition, legal certainty, charge conditions, valuation (Art. 124D), borrower independence, and insurance monitoring. Exposures failing any criterion are "other real estate" under Art. 124J (150% if income-dependent, or counterparty / floor RW otherwise). See the Art. 124A specification for full details.

General Residential Real Estate — Loan-Splitting (PRA Art. 124F):

The PRA adopted loan-splitting for general residential (not income-dependent):

• Secured portion (up to 55% of property value) → 20% risk weight
• Residual → counterparty risk weight (75% for individuals per Art. 124L, 85% for non-retail SME, or the unsecured corporate RW)

Income-Producing Residential Real Estate — Whole-Loan (PRA Art. 124G, Table 6B):

Commercial Real Estate — General (Art. 124H):

For natural persons and SMEs, CRE uses loan-splitting: 60% RW on the secured portion (up to 55% of property value), counterparty RW on the residual (Art. 124H(1)–(2)).

For all other counterparties (large corporates, institutions), no loan-splitting applies. Art. 124H(3) assigns a whole-loan risk weight:

RW = max(60%, min(counterparty_rw, income_producing_rw))

This ensures the weight is at least 60% but capped at the lower of the counterparty's unsecured weight and the income-producing table rate (Art. 124I). Set cp_is_natural_person and is_sme in the input data to route exposures correctly — if both are False (or absent), the Art. 124H(3) path applies by default.

Commercial Real Estate — Income-Producing (PRA Art. 124I):

Junior Charge Treatment (Art. 124I(3)): Where prior-ranking charges not held by the institution exist, the whole-loan RW is replaced by a band-dependent absolute weight (NOT a multiplier on Art. 124I(1)/(2)): ≤60% LTV → 100%, 60–80% → 125%, >80% → 137.5%.

Other Real Estate (Art. 124J): Exposures failing the Art. 124A qualifying criteria receive punitive treatment: 150% if income-dependent (Art. 124J(1)); counterparty RW if residential and non-income-dependent (Art. 124J(2)); or max(60%, counterparty RW) if commercial and non-income-dependent (Art. 124J(3)). Set is_qualifying_re = False to route to this treatment. See the Art. 124J specification.

ADC Exposures (Art. 124K)¶

Acquisition, Development and Construction (ADC) exposures — loans to corporates or SPEs financing land acquisition for development/construction, or financing RE development/construction — receive a default 150% risk weight (Art. 124K(1)), up from 100% (standard corporate unrated) under CRR where Art. 128 was omitted.

A reduced 100% risk weight is available for residential ADC only where both: (a) the exposure has prudent underwriting standards; and (b) either legally binding pre-sale/pre-lease contracts with substantial forfeitable deposits cover a significant portion of total contracts, or the borrower has substantial equity at risk (Art. 124K(2)). Commercial ADC always receives 150%.

Set is_adc = True and optionally is_presold = True in the input data. The is_adc flag overrides all LTV-based RE treatment. See the ADC specification for full qualifying conditions.

Retail Exposures¶

Classification threshold: The retail aggregate exposure limit changes from EUR 1m (CRR Art. 123(c), FX-converted) to a fixed GBP 880,000 (Art. 123(1)(b)(ii)). The QRRE individual limit changes from EUR 100k to GBP 90,000 (Art. 147(5A)(c)). This eliminates FX volatility from retail classification boundaries.

Payroll/pension loans (35%) were introduced by CRR2 (Regulation (EU) 2019/876) — not new in Basel 3.1. The four qualifying conditions (unconditional salary/pension deduction, insurance, payments ≤ 20% of net income, maturity ≤ 10 years) are carried forward unchanged from CRR Art. 123 second subparagraph to PRA PS1/26 Art. 123(4).

Currency Mismatch Multiplier¶

For unhedged retail and residential real estate exposures where the lending currency differs from the borrower's income currency, a 1.5x risk weight multiplier applies (PRA PS1/26 Art. 123B / CRE20.76). Art. 123A governs retail qualifying criteria, not currency mismatch. The effective risk weight is capped at 150%. This is distinct from the 8% FX collateral haircut used in CRM (CRR Art. 224).

To trigger the multiplier, set cp_borrower_income_currency on each exposure. When it differs from currency, the 1.5x multiplier is applied automatically and the currency_mismatch_multiplier_applied output column is set to True. COREP memorandum row 0380 is populated from this flag.

Defaulted Exposures¶

Defaulted exposures receive a risk weight based on provision coverage (PRA PS1/26 Art. 127 / CRE20.87-90). Where specific provisions are ≥20% of the outstanding amount of the item or facility (gross), the unsecured portion receives a risk weight of 100%; otherwise 150%. When eligible collateral is present, the secured portion retains the collateral-based risk weight and only the unsecured portion is subject to the provision test.

8. Input Floors for IRB¶

Beyond PD and LGD floors, Basel 3.1 introduces:

EAD Floors: - CCF cannot be lower than SA values for comparable exposures - A-IRB CCFs must be at least 50% of the SA CCF (CRE32.27) - Minimum 10% CCF for unconditionally cancellable facilities (vs 0% CRR) - UK residential mortgage commitments carved out at 50% CCF (Art. 111 Table A1 Row 4(b)) — PRA-specific, not in BCBS (which would assign 40%). See key differences

Maturity (Art. 162):

• F-IRB fixed maturities (0.5yr repo / 2.5yr other) — deleted; all IRB firms must calculate M
• Revolving exposures must use max contractual termination date (Art. 162(2A)(k))
• Purchased receivables minimum M raised from 90 days to 1 year
• SME maturity simplification (Art. 162(4)) — deleted
• Floor remains 1 year (general); cap remains 5 years

See Technical Reference for the full comparison table.

9. Financial Sector Entity Correlation Multiplier (CRE31.5)¶

Large financial sector entities (LFSEs) — regulated FSEs with total assets ≥ GBP 79 billion under PS1/26 Glossary p. 78 (CRR equivalent: ≥ EUR 70 billion per CRR Art. 142(1)(4)) — and unregulated financial sector entities (regardless of size) receive a 1.25x multiplier on their asset correlation (Art. 153(2) / CRE31.5). This increases capital requirements for exposures to financial institutions. The multiplier mechanism is unchanged between CRR and Basel 3.1; only the LFSE definition switches from the CRR EUR 70bn threshold to the PS1/26 GBP 79bn threshold.

10. Due Diligence Requirements¶

Basel 3.1 introduces a framework-wide due diligence (DD) obligation for Standardised Approach exposures under PRA PS1/26 Art. 110A. CRR has no equivalent SA-specific provision.

Core obligation (Art. 110A(2)). Firms must "perform due diligence to ensure [they have] an adequate understanding of the risk profile, creditworthiness and characteristics of exposures to individual obligors and at a portfolio level". The sophistication of DD scales with the nature, scale, and complexity of the firm's activities (Art. 110A(3)).

Minimum practical standards (Art. 110A(4)). Firms must:

• Take reasonable and adequate steps to assess each obligor's operating and financial condition.
• Maintain internal policies, processes, systems, and controls that assign the appropriate risk-weighted exposure amount to each obligor.
• Perform DD before incurring an exposure and re-perform at least annually thereafter.
• Perform DD at the level of each individual exposure where reasonably practicable.
• Factor the obligor's corporate-group membership into the assessment.

Exempt obligor classes (Art. 110A(5)). The obligation does not apply to exposures in scope of:

• Central governments and central banks (Art. 112(1)(a))
• Regional governments and local authorities (Art. 112(1)(b))
• Public sector entities (Art. 112(1)(c))
• Named 0%-RW multilateral development banks (Art. 117(2))
• International organisations (Art. 118(1))

All other obligor classes — institutions, corporates, retail, real estate, equity, CIUs, and non-named MDBs — are within scope.

Risk-weight uplift. Where internal DD indicates the class/ECAI-based risk weight understates the risk, the firm must assign a higher RW. The uplift is unbounded — not limited to one CQS step. Three narrower class-specific CQS step-up rules apply alongside Art. 110A for rated exposures: Art. 120(4) (rated institutions), Art. 122(4) (rated corporates), and Art. 129(4A) (covered bonds). Each limits the uplift to one CQS step and applies only where ECAI assessment is the default RW source.

Using the calculator. The facility schema exposes two optional fields to carry DD status and any uplifted RW:

facility = {
    "facility_ref": "LOAN-001",
    # ... standard fields ...
    "due_diligence_performed": True,       # firm attestation per Art. 110A(2)
    "due_diligence_override_rw": 1.50,     # uplifted RW (decimal) — 150% here
}

Override behaviour:

• Applied as the final risk-weight modification — after CQS lookup, CRM substitution, and the Art. 123B currency-mismatch multiplier, before RWA = EAD × RW.
• Directional floor: RW_final = max(RW_calculated, RW_override). Lower override values have no effect.
• Null override values are silently ignored.

Validation:

• When due_diligence_performed is absent from the input under Basel 3.1, the calculator emits a SA004 (ERROR_DUE_DILIGENCE_NOT_PERFORMED) WARNING — the calculation continues.
• Under CRR both fields are ignored and no warning is raised.

Audit: the output column due_diligence_override_applied (Boolean) flags exposures whose RW was raised by the override — use this to reconcile against DD-process evidence and to populate internal disclosures.

See the Basel 3.1 SA Risk Weights specification for the verbatim regulatory text and the full SA-calculator sequencing diagram.

Risk Weight Tables (Basel 3.1)¶

Sovereign Exposures¶

Institution Exposures¶

External Credit Risk Assessment Approach (ECRA, PRA PS1/26 Art. 120 Table 3):

Standardised Credit Risk Assessment Approach (SCRA):

Covered Bond Exposures¶

Eligible covered bonds issued by institutions receive preferential treatment under Art. 129. Rated bonds map into Table 7 (CQS 1 → 10%, CQS 2/3 → 20%, CQS 4/5 → 50%, CQS 6 → 100%) — PRA PS1/26 retained the CRR values and did not adopt the BCBS CRE20.28–29 reductions. Unrated bonds derive their RW from the issuing institution's senior unsecured RW via the Art. 129(5) expanded 7-entry table (new rows at 15%/20%/25%/35% to accommodate ECRA 30% / SCRA 40%/50%/75% institution weights). See Key Differences — Covered Bonds for the full CQS table and CRR comparison, and the institution exposure-class page for the practitioner walk-through.

Subordinated Debt¶

Equity Exposures¶

Basel 3.1 significantly increases equity risk weights and removes IRB for equity (SA only).

Transitional phase-in schedule:

Under CRR, standard equities receive 100%, with some categories at 250% or 400%. The phase-in allows firms to gradually adjust to the higher capital requirements.

IRB Restrictions¶

Basel 3.1 restricts IRB usage for certain exposures (Art. 147A). For some classes, all IRB approaches are removed (SA only). For others, only A-IRB is removed (F-IRB with supervisory LGD remains):

IRB 10% RW floor for UK residential mortgages (PRA-specific): Non-defaulted retail exposures secured by UK residential property must have a minimum risk weight of 10% under IRB, regardless of model output. This is applied as a post-model adjustment.

CRM Changes¶

Haircuts¶

Supervisory haircuts are recalibrated under Basel 3.1 (CRE22.52-53), with significant increases for equities and long-dated bonds. Maturity bands expand from 3 (CRR) to 5 (Basel 3.1).

Key changes:

Maturity band expansion: CRR uses 3 bands (0-1y, 1-5y, 5y+). Basel 3.1 splits the longer bands into 5: 0-1y, 1-3y, 3-5y, 5-10y, 10y+. Short-dated haircuts (0-1y) are unchanged.

CRM Method Taxonomy¶

Basel 3.1 restructures CRM methods with clearer names and applicability:

Foundation Collateral Method overcollateralisation thresholds (Art. 230):

Guarantee Recognition¶

• Unfunded credit protection maintained
• G-10 sovereign guarantees: 0% RW
• Covered bond issuer guarantees: Enhanced treatment
• New requirement: Unfunded credit protection must include "change of control" provisions (transitional relief for pre-2027 contracts until June 2028)

Specialised Lending¶

Slotting remains available with updated risk weights (PRA PS1/26 Art. 153(5) Table A), including the introduction of HVCRE as a distinct sub-type with elevated weights (UK CRR has no HVCRE concept). The table below shows the default column values (column B for Strong, column D for Good per Art. 153(5)(c)). Lower column A/C weights are available for exposures with < 2.5 years residual maturity (Art. 153(5)(d)) or enhanced underwriting criteria (Art. 153(5)(e)/(f)). See Key Differences for the full Table A with all subgrade columns.

SA Specialised Lending (Art. 122A-122B)¶

Basel 3.1 introduces explicit SA risk weights for specialised lending, separate from slotting. Unrated exposures use the type-specific weights below; rated exposures fall through to the standard corporate CQS table per Art. 122A(3).

High-quality operational project finance requires: low LTV, strong revenue predictability, contractual protections, and adequate refinancing capacity.

Configuration Example¶

from datetime import date
from rwa_calc.contracts.config import CalculationConfig

config = CalculationConfig.basel_3_1(
    reporting_date=date(2027, 1, 1),
)

# The factory sets on the config:
# - regime_id: "b31"
# - output_floor: 72.5% election (with transitional schedule)
#
# Regulatory values are NOT stored on the config — they resolve from the b31
# rulepack pack (rwa_calc.rulebook) via resolve(regime_id, reporting_date):
# - scaling factor: 1.0 (removed under Basel 3.1)
# - PD floors: differentiated by class
# - LGD floors: by collateral type

Implementation Timeline¶

gantt
    title Basel 3.1 Implementation Timeline
    dateFormat  YYYY-MM-DD
    section Milestones
    PRA PS1/26 Published     :done,    2024-09-01, 2024-09-30
    Industry Preparation     :active,  2025-01-01, 2026-12-31
    Basel 3.1 Go-Live        :         2027-01-01, 2027-01-01
    section Output Floor (PRA 4-year)
    60% Floor                :         2027-01-01, 2027-12-31
    65% Floor                :         2028-01-01, 2028-12-31
    70% Floor                :         2029-01-01, 2029-12-31
    72.5% Floor (Final)      :         2030-01-01, 2030-12-31

Regulatory References¶

Next Steps¶

• CRR - Current framework
• Framework Comparison - Side-by-side comparison
• Calculation Methodology - How calculations work